There are several theories on what is the best way to pay down debt, but it really depends on your personality and what motivates you. Here are 5 different ways to help you get started.
Debt snowball is when you concentrate on the smallest debt first, then the next and so on. According to Dave Ramsey, probably the best known debt snowball advocate, the principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is dilute.
Highest interest rate
Others suggest that you should pay off the debt with the highest interest rate to save money in the long run. It also allows you to pay off debt faster because you are paying less in interest. However, debt snowball supporters think you might lose motivation and become overwhelmed with the high interest rate method.
Use your savings
If you have an emergency fund to cover at least 3 months’ worth of expenses, the rest should go toward paying off debt. Especially in the current low savings rate environment, it makes sense to pay off high interest rate debt with any extra savings you have.
If you qualify, there are debt consolidation options to put all of your debt into one loan with a lower combined interest rate. You can also transfer debt to one credit card, but make sure you know fees and interest rates associated with this. This allows you to concentrate your efforts.
Increase minimum payments
Probably the most unsophisticated way to pay down debt is to simply stop using your credit cards and pay more than the minimums. Create a budget and know exactly what you owe and what you can afford to pay each month and apply it to each of your cards. This will work if you are a disciplined individual.
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Categories: Credit, Debt Reduction, Finances