Few mostly used methods in DMP for betterment of finances

The debt avalanche method, also known as debt stacking, looks a lot like the debt snowball method — but with one key distinction. Instead of paying off the smallest balance first, you start with the highest interest rate and work your way down.

Make a list of all your credit card debt balances and order them from smallest to largest.

Pay the minimum amount on each debt every month, but make extra payments on your smallest debt.

Once you repay that debt, take the money you’ve freed up and pay off the next smallest debt.

Cycle through steps 2 to 3 until you have paid off all your debt.

As an example, let’s say you have the following debt accounts:

  • Account A: 6,000 balance and 21.0% APR
  • Account B: $15,000 balance and 16.2% APR
  • Account C: $2000 balance and 19.5% APR

If you follow the debt snowball method, you would pay off Account C first, as it has the smallest balance. Once it’s repaid, you’d target Account A and then finally Account B. Conquering smaller balances one at a time gives you motivation to tackle the next. And as you clear your debts, you free up more funds for the next account.

This method is not without its disadvantages, however. You might pay more in interest charges compared to other debt repayment strategies, such as a debt avalanche. That’s because a debt snowball doesn’t take interest rates into account, so you could spend several months paying off a low-cost debt. But if quick wins keep you motivated, then a debt snowball can be an effective strategy.

The debt avalanche method, also known as debt stacking, looks a lot like the debt snowball method — but with one key distinction. Instead of paying off the smallest balance first, you start with the highest interest rate and work your way down.

Here’s what it would look like applied to the example from the previous section:

  • Account A: $6,000 balance and 21.0% APR
  • Account B: $15,000 balance and 16.2% APR
  • Account C: $2000 balance and 19.5% APR

In this situation, you would pay down Account A first, Account C next and Account B last.

The debt avalanche is a great option if you want to spend less on fees and get out of credit card debt quicker. Credit cards with high interest rates can keep you in the red longer as a larger part of your monthly payments go toward paying interest rather than decreasing the principal.

By tackling debts with the highest interest rates first, you’ll get rid of these pesky penalties sooner and free up more funds to pay off the rest of your credit card balances. Just like an avalanche, it takes a lot before you see any changes. But once you reach the tipping point, everything falls into place quicker than you’d expect.

However, because it can take longer to see results compared to a debt snowball, this repayment strategy can be discouraging for some people

Debt snowball method vs. debt avalanche method

Wondering what’s better for you — a debt snowball versus a debt avalanche? Here’s what you need to know if you’re choosing between the two:

The debt snowball method is arguably more popular and involves paying off debts from smallest balance to largest balance without taking APR into consideration. Because you start by paying off debts with the smallest balance, you often knock out entire balances more quickly than you would with the debt avalanche method.

For most people, a debt snowball works best when they have a steady amount of extra cash to pay off debt. That’s because this repayment method assumes that as soon as one debt is paid off, you’ll take the minimum that you would have paid on that debt and apply to the debt with the next smallest balance — in effect “snowballing” the amount you owe.

Many people like the debt snowball method because of the motivation that comes from paying off a debt once and for all — often in as little as a few months. While the debt avalanche method will help you save more money on interest and pay off your overall debt sooner, research has shown people tend to be more successful with the debt snowball method because of the psychological boost that comes from eliminating an entire balance.

Benefits of a Debt Management Plan

  • A debt management plan is a system that allows you to pay one monthly payment that covers all of your included debt. Essentially, once your creditors agree to the plan, you make a single payment each month to the facilitator of your debt management plan. It’s not a loan, however, and your monthly payment is divided and dispersed to your creditors every month.
  • When you request a debt management plan and your creditors agree to it, they will often lower your interest rate and waive any late fees that you currently have. They will also agree to a set monthly payment that has your account paid in full in no more than five years. For most clients, these benefits lead to massive savings over the course of the repayment plan.

Frequently Asked Questions

One concern some consumers have is how credit counseling affects your credit score. A DMP won’t directly go onto your credit report, but it can have a positive impact on your credit score as long as you make on-time payments and continue to lower the amount of debt you have.

One of the downsides of a DMP is that you may have to close any credit cards listed on your plan while you’re enrolled. So, if you find yourself backed into a financial corner, you won’t be able to use your credit cards. If this is a concern, instead consider strategies to pay off credit card debt.

Yes, you can pay your DMP off early. You can do this by providing a larger monthly payment. Doing this can help lower your credit utilization ratio and help improve your credit score.

While it’s not impossible to qualify for a mortgage while on a DMP, it may be challenging to find a lender that will approve you. Each lender will have its own set of mortgage requirements so be sure to check with a potential lender that a DMP won’t disqualify you before filling out an application.
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