Paying Off Debt

If you’re up to your neck in debt, it may seem daunting trying to pay it off. However, if you get a solid budget, along with a good system in place, you will have no trouble paying off debt.

However, it seems like every money expert has a different way of going about paying off debt, and you may be confused as to which works better. Well, they all work, and the choice is really personal. Some experts go with one method to get you small win so you have emotional victories. Some experts stick strictly to the math, and go after paying off debt the most economical way. Here is a breakdown of some common strategies for paying off debt.

The Debt Snowball

The debt snowball is a way to pay off your debt by paying off the highest interest rate debt first, and then paying the same amount of money to your lower debts until they are paid off. Sound confusing? Well first, sort out all your credit cards by their interest rate. Then, look at your total monthly payment to all cards. To make it easy, let’s say you have the following:

$1,000 at 10% with a credit limit of $5,000
$3,000 at 15% with a credit limit of $5,000
$5,000 at 20% with a credit limit of $5,000
Total current monthly payment is $800 per month.

For reference, total interest paid will be $1,550 per year

The first thing to do would be to use the lower interest rate card to pay off the highest interest rate. Doing that alone will free up extra money to pay off the debt with (no matter what the new minimum payment is, still pay $800). Now you have this:

$5,000 at 10%
$4,000 at 15%
20% Card is paid off

For reference, total interest paid drops to $1,100, as savings of $450 per year

With the lower interest rates, your payment will go farther each month You could try to take this a step further, and try to transfer all the balances to a new card with an even lower rate, or even a promotional 0% APR balance transfer. This would save you even more money, and allow you to pay off your debt quicker.

Debt Repayment Variations

There are two other main variations to paying off debt. First, you could put all your resources into paying off your largest debt first, while still paying the minimums on your other debts. Once your biggest debt is paid off, you roll all the extra available payments into your next largest debt, and keep doing that until all your debts are paid off. By paying off debt this way, you get a big win first, and the smaller debts pay off quicker due to the larger payments.

A second variation is to pay off small debts first. This is more of a psychological way to go about it, because it is designed to give you a good feeling to pay off debt. The same principal applies, once the small debts are paid, you continue rolling your payments into your other debts.

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