Building Debt Awareness: Let's Talk About It

Paying off large amounts of debt can be overwhelming. Despite millions of Americans having debt, it's not easy to talk about, and you may not know where to look for help.

If you struggle with debt, rest assured you are not alone in your financial journey. In Q2 of 2022, Americans had over $16.15 trillion in debt, according to the New York Federal Reserve. To put that in perspective, you could spend a million dollars a day, every day, for 42,000 years and still not reach that amount.

With this amount of debt, and with credit card interest rates as high as 30%, according to Forbes,  it’s no wonder so many Americans are struggling. With interest rates that high, and because of howcompound interestworks, it can be really difficult to pay down your debt quickly. Knowing what compound interest is and how it might impact your debt is the first step in building debt awareness. Knowing the resources you have available and how Rocket Money^SM can help is the next step toward more financial freedom. 

What Is Compound Interest? 

Compound interest is when your interest grows based on the amount you originally borrowed, plus any interest incurred. In other words, your interest is generating even more interest.

If you're investing, compound interest is great – it allows you to have faster growth over time. If you’re in debt however, it means the amount you owe will get bigger unless you bring down the principal balance (the amount owed separate from any interest charges or fees).

Making extra payments on your debt is so helpful because it brings down that principal, decreasing future interest charges. Even an extra payment as small as $25 per month can save you hundreds or even thousands of dollars in interest over time.

Two popular strategies for paying down your debt are the avalanche method and the snowball method. Both involve prioritizing any extra payments according to either the highest interest rate or lowest balance debt.

Avalanche Vs. Snowball Method

At a high level, the avalanche and snowball methods are two different ways you can pay down your debt faster and save money on interest. While both require that you continue to pay your minimum payments on all debts, they each employ a different strategy for making extra payments:

• Avalanche method: applying any extra payment to the highest interest rate debt first (regardless of the balance on that particular debt). Once that debt is paid off, you apply that entire payment to the next highest interest rate, in addition to its minimum payment.
   
• Snowball method: applying extra payments to the lowest balance debt (regardless of the interest rate). Once that debt is paid off, you apply that entire payment to the next lowest balance, in addition to its lowest payment.

For example, let’s say you have $6,000 of debt across three different credit cards:

Using the avalanche method, you would apply any extra payment – let’s say an extra $25 – to the Visa card first because it has the highest interest rate. You would pay $75 total (your minimum payment, plus $25) toward that card. Once that is paid off, you would apply that $75 payment to the Mastercard, which has the next highest interest rate. You would pay a total of $100 toward that card ($75, plus the Mastercard minimum payment of $25).

The snowball method is best for those who prefer a quick win. Using this method for the example above, you would start with the Mastercard because it has the lowest balance. Once that's paid off, you would move to the Target card as the next lowest balance debt, then the Visa card.

Out of both methods, the avalanche method would save you the most money in interest over time. If using the snowball method, you’ll pay a bit more over time, but will likely wipe out your first debt faster, which can be motivating. With either method, you should continue to make minimum payments across all your debt. The strategy is only for any extra payment you can afford.

Pros And Cons Of Both Methods

But where are you supposed to find extra money to make that payment? That’s where Rocket Money can help. By tracking your spending to find where you can cut costs, cancelling subscriptions or negotiating bills, we can help you find extra money to pay down your debt.

How To Use Rocket Money To Tackle Your Debt

Dealing with debt is no easy task, but there are things you can do to try and accelerate the process. Below are a few ways Rocket Money can help, as well as some options you might consider depending on your situation.

Find Out How Much Debt You Have 

The first step in paying off your debt is to figure out how much you have. One easy way to do this is to review your free credit report. If there are any debts that may not show up on a credit report – like a handshake agreement with a friend, for example – make sure you consider these as well.

Checking your credit report will not impact your credit score, and it will show you if you have any past due payments or delinquencies you’ve forgotten. You can review your free credit report when you sign up for Rocket Money. You can also find your current credit card balances on the Dashboard tab if you've linked all your accounts. ‍

Free Up Cash To Put Toward Your Debt

Rocket Money can help you accelerate your debt payoff by cancelling subscriptions or negotiating bills for you, to free up extra cash.

Use A Budget To Manage Your Spending 

Use Rocket Money to set up your budget and estimate how much you can put toward your debt. You can also use your budget as a guide to track your spending to identify areas where you might be able to cut back.

Consider Debt Consolidation

Debt consolidation involves taking out a new credit or loan to pay off your existing debts, usually at a lower monthly payment or interest rate. It also simplifies your payments, leaving you with only one monthly payment, though it may require an upfront fee. A personal loan from our sister company Rocket Loans^SM could help you consolidate your debt. Talk to a financial advisor to understand the best solution for your situation.

Refinance Your Student Loans

Refinancing is the process of using one new loan to pay off other loans, usually at a lower interest rate or monthly payment, similar to credit card consolidation. Using Rocket Money's partner, Credible, student loan borrowers may be able to refinance their student loans, saving hundreds or even thousands in interest over time. That said, you'll want to be careful if you have federal student loans, given some of their unique benefits relative to private student loans. Read more about the pros and cons of student loan refinancing in our Help Center.

Consider Credit Counseling

If you've tried it all and you're still having trouble meeting your monthly payments, then you might consider getting some free help through the National Foundation for Credit Counseling (NFCC). 

The NFCC is a nonprofit organization that helps people having difficulty making their payments through a debt management plan. This is not to be confused with a debt settlement plan, which is often provided by a for-profit company with a reputation for scams. Instead, a debt management plan is an agreement you enter with a nonprofit agency to assist you in paying off your debt. They’ll help you create a budget and may be able to lower your interest rate or eliminate fees. Entering a debt management plan does not lower your credit score and is usually low-cost or completely free.

The Bottom Line

There are a few methods that could help you tackle your debt. The avalanche method takes on your highest interest debt first and can save you on interest payments over time. The snowball method, which eliminates your lowest debt balance first, works best for people looking for quick wins to keep them motivated to continue paying down debt.

For more insights on how to get your finances in line, get started with Rocket Money today.