How to get out of debt: the two methods that work

When you owe in several places at once, the problem is usually not the total: it is that money is spread thin and no single debt ever closes. Closing them one at a time is what changes the outcome.

Before choosing a method: the list

Write down every debt with four things: who, how much, the annual rate, the minimum payment. Add the minimums up. That total is untouchable — missing a minimum costs more than any strategy can win.

Whatever you can pay above that total is your only weapon. Everything that follows is about where to point it.

Avalanche: the most expensive first

Pay the minimum on everything and put every spare peso into the debt with the highest rate. When it closes, that whole payment moves to the next one.

This method always costs the least money. There is no argument about the arithmetic.

Snowball: the smallest first

Pay the minimum on everything and put every spare peso into the smallest balance, whatever its rate. When it closes, the payment moves on.

It costs slightly more in interest and it gets finished far more often. The reason is not financial: closing a debt completely, watching the list get shorter, is what keeps people going in month four.

Which to choose

• If the rates differ sharply — a card at forty per cent and an interest-free loan from a relative — use avalanche. The money difference is too large to ignore.
• If the rates are similar, or you have abandoned this before, use snowball. The method you finish beats the optimal one you drop halfway.

A mix works well: close one small debt for momentum, then switch to avalanche.

Credit cards in the meantime

A card balance is not an ordinary debt: it grows by itself. Three rules while you clear it:

• Stop using it. You cannot empty a bucket with the tap running. If you need plastic for a deposit, make it a debit card.
• Always more than the minimum. The minimum payment is designed to keep the debt alive for years. That is the business model, not advice.
• Know your statement date and your payment date. They are different. Buying just after the statement date gives you nearly two months; buying just before gives you two weeks.

Consolidating

Rolling several expensive debts into one cheaper loan works, on one condition: that you do not start using the cards you just freed up. If you do, you end up with the old debt as a loan and a new one on top.

If you are already behind, talking to the bank before they call you usually gets better terms than talking afterwards. It is uncomfortable and it is cheaper.

How long it will take

Divide what you owe by what you can pay above the minimums for a rough timeline, a little worse because of interest. That figure, however large, is what changes the feeling: a debt with an end date gets tolerated, a debt without one gets abandoned.