ROCHESTER, N.Y. (WROC) — CPA Ryan Lane discussed some popular approaches to paying down your debt Monday during News 8 at Sunrise.
“There are two great methods to look at for paying down your debt,” Lane said. “There’s the snowball method and the avalanche method. Under the snowball method, you start with your smallest debt first and you work your way up. Under the avalanche method, you start with the highest interest rate and work your way down. And for each of those methods, you take your prior minimum payments and roll those forward. Now, the avalanche method might mathematically be the best one to go with, but it’s most important to do the one that will stick longest for you.”
Lane said you must make your minimum payments on time to avoid penalties, higher interest rates, and a lowering of your credit score. But it’s also important to pay more than the minimum. “It’s important to pay more than your minimum payment, as much as you can, because the credit card companies have you paying that over a number of years, so that’s going to cause you to incur a significant amount of debt,” he said. The amount you will ultimately pay to eliminate the debt grows as additional interest is applied to the account each month.
Having a budget to address your debt is also important. “I’d say you want to set up your yearly budget,” explained Lane. “That will allow you to capture all those non-recurring expenses, month to month, or those once a year type expenses. But then, you’ll want to shift to a monthly budget and segment a portion of that out for those non-recurring expenses. Set it aside so you’re not surprised come that time.”
Lane noted the average American holds $8,000 to $9,000 worth of revolving credit debt. “It would be a good thing to take that budget we talked about, and set a portion aside to start paying down that debt as you go forward. Now it’s also important to understand, in this technology age, no matter how frequently you visit a site, to wipe your personal information and wipe your financial information because credit card theft and fraud are pretty prevalent these days. So that will help you protect against that.”
For more Smart Money advice, visit the New York State Society of CPAs website.