Understand These Concepts to Start Clearing Your Debts

Knowing some simple terms is important when building a success plan.

Debt can feel overwhelming and impossible to escape. Not to mention the language involved can sound like jargon, like a doctor discussing a disease you don’t want to know about. But just as it helps to understand heartburn or stress fractures—there are effective treatments!—the first step to taking control of debt is to understand your options. Knowing a few key terms and taking small steps now may help prevent a future bankruptcy or other long-term financial difficulty.

Minimum payment. You might already know that this refers to the smallest amount that you can pay each month to stay out of trouble. But it’s also the thing you have to look past to see what interest rates are doing to the debt you’re rolling over. Paying the minimum means that the rollover amount is large and will likely grow fast—and that won’t be a pretty picture. You can see the payments needed to pay off credit card debt faster over various time periods with our calculator.

Revolving debt vs. term loans. Mortgages, car loans and student debt have specified monthly payments and a fixed term: you pay them off over a certain number of years. These may form part of your total debt, but they’re often less prone to getting out of control than revolving debt. Revolving debt comes from credit cards, payday loans and lines of credit which, although they may require only a minimum payment, can keep growing indefinitely as the interest charges mount on the balance.

Snowball method. This is one of two major ideas about the way to attack debt: go after your smallest loan balance first while making the minimum payments on everything else. When the first balance is paid off, you move on to the next smallest balance, pay it off, and repeat. It’s as much about the thrill of small successes as it is about percentages. “Getting that [first] quick win is really motivating,” says Melinda Opperman, executive vice president of Credit.org, a consumer financial education and coaching organization.

Avalanche method. This is the other approach to attacking debt. Under this method, you also repay one loan at a time, but you begin with the account charging the highest interest rate, then move on to the next highest, and so on. This might save more money than the snowball method, says Opperman, because high-interest loans add up the fastest. “But,” she adds, “progress could be slower.” If your high-interest debt is also a very large debt, it requires staying power to keep up the attack month after month. 

Consolidation. Another approach is to use a consolidation loan to pay off all of your credit cards. "Restructuring your debt into one loan can help ease your anxiety," says Jordyn Kemats, consumer bank performance and lending manager at Huntington. “You get the ease of one payment and typically you’ll save on interest,” she adds, compared with what you were paying before. This approach will likely help you most if you can apply any savings to continuing to pay down your debt.

Now you’re armed with some basic debt terms and concepts. See a Huntington banker or a credit counselor for advice on what type of payback system could work best for you.

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Interview with Melissa Opperman, confirmed via email.

Interview with Jordyn Kemats, page 3