by Chelsea Springli 
Rising interest rates means more money taken out of our pockets each month. Debt can be a challenge to manage, even in the best of times. In this economy of rising interest rates, how do you effectively manage your debt?
Rising costs due to inflation have some people relying on credit to make ends meet. Rising interest rates make borrowing money more expensive and the costs of carrying balances on high-interest credit card debt more of a burden, potentially adding to your overall concerns about money. If you have a credit card or other debt, now is the time to create a plan to pay it down as soon as possible. A good place to start is with our free online debt calculators.
How Does Rising Credit Card Interest Rates Impact My Budget?
A rise in interest rates will increase what you pay in interest. This means that it may take you longer to pay off your credit card debt. Be sure to regularly review your balances, terms, and interest rates. By staying on top of this important information, you can pivot and make informed decisions about managing your debt, including whether it would be beneficial to transfer your balances to a lower-interest credit card.
Pro Tip: Pay off your credit card balance by the due date each month. By doing this, you’ll avoid interest charges on what you purchased that month and save money!
Debt Payoff Strategies – Snowball and Avalanche
Paying off debt can be challenging, especially if you owe a lot of money to multiple companies and regularly only pay the minimum amount due each month. To free yourself from a large debt burden, you will have to accelerate payments. There are two popular methods you can use to reduce your debt – the debt snowball method and the debt avalanche method. Each one aggressively attacks what you owe, but in slightly different ways.
Snowball Method
The snowball method involves focusing on paying off the smallest debt first. Then next working on the next-smallest debt until they’re all paid off. To start, pay the minimum toward all of your loan balances. Use the rest of the margin in your budget to pay extra toward the loan with the smallest balance.
- Pros: This method gives you quick wins. You can see some results sooner rather than later. Some people benefit from seeing their list of debts decrease. That sense of accomplishment can give them the boost they need to stay on track.
- Cons: You could end up paying more interest over time. Of course, that means your debt repayment could be extended due to owing more money from the added interest.
Avalanche Method
The avalanche method involves paying off debt by getting rid of your debt with the highest interest rate first and then moving on to the loan with the next highest rate. This enables you to get rid of heavy interest rates quicker and to put more money toward other things. To start, pay the minimum toward all of your loan balances. Use the rest of the margin in your budget to pay extra toward the loan with the highest interest rate.
- Pros: It saves more money in the long run. By attacking the highest interest rate first, you pay less interest over time.
- Cons: When paying down the highest interest rate first, it’s likely the debt with the highest balance. For some people, they get discouraged when they don’t see progress being made faster.
Which Method is Right for You?
Your personality and lifestyle play a role in which of these methods is best for you. If you think you need initial motivation to keep going, you may want to choose the snowball method. Is your main concern finding an approach that will cost you less money over time? Then you might want to go with the avalanche approach. Be flexible though, you can always switch approaches down the line if you find that the one you initially chose isn’t working for you. My husband and I started using the debt snowball method to pay down our debt. Once we pay off the first balance, we’ll have a lot more margin to pay off the next loan a couple of months later.
When Should I Ask for Help?
There may be times when you need some additional help to manage your money. If you are struggling to make payments on your credit cards or other bills and are looking for debt management advice, we can help. Feel free to stop by any of our branch locations to learn about our financial counseling program. Paying off debt takes time, don’t expect it to go away overnight. Our resources are here to help you at any time.
Pro Tip: It never hurts to ask. Whether it’s asking a creditor to lower your interest rate, forgiveness on making a late payment, setting up a loan skip a payment, or just getting some financial advice you’ll be thankful that you did. The best policy is to keep talking to your creditors, if they know what is going on in your life most creditors will do their best to work with you through the hard times.
It’s completely doable to reduce your debt even in these challenging economic times. Create a plan and take it one step at a time. Soon you’ll be on your way to paying down your debt in no time.
