Debt management: the pros and cons of 3 debt repayment strategies

Here’s an evaluation of three basic debt management strategies.

Make the minimum payments on all accounts
The minimum payment is the amount that the borrower is required to pay back to the lender by a certain date. Keep in mind that missed payments will tank your credit score, so it’s important that you cover at least this amount each month.

• Pros. The minimum payment usually amounts to only two to five per cent of the balance owed.

• Cons. If you only make the minimum monthly payment, you could end up spending more than twice the original amount. This is because interest will keep accumulating on your debt.

Prioritize low-balance debts (the snowball method)
This approach to debt reduction involves the borrower strategically paying off multiple loans by prioritizing the account with the lowest balance first. This is done by consistently repaying more than the minimum amount owed on the account.

• Pros. Focusing on the smallest balance and quickly clearing it provides a strong psychological incentive to maintain good financial habits.

• Cons. Not prioritizing loans with a higher interest rate may not make financial sense in the long term.

Prioritize high-interest debts (the avalanche method)
Another, faster way of clearing multiple debts is to prioritize paying off the high-interest loans first. Once again, you’ll need to consistently pay more than the minimum amount on the associated account. However, this method reduces the overall interest you’ll pay.

• Pros. This method will ensure you pay the least amount of interest possible.

• Cons. Reducing debt this way requires a lot of discipline. In addition, it doesn’t provide the same quickly-gained sense of accomplishment as the snowball method.

Overall, it’s a good idea to make more than the minimum payments on your accounts. In addition, while prioritizing high-interest-rate loans is ideal, dealing with smaller balances may work better for you.