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What’s the Best Debt Payoff Strategy for You?

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You know the old saying “failing to plan is planning to fail”? That doesn’t just apply to college tests and job applications. It also applies to paying off debt.

So before you start throwing money at your debt haphazardly, see which of these three debt payoff methods will work best for you.

The Debt Snowball

With the debt snowball method, you pay off your debts in order from smallest balance to largest balance, regardless of interest rate or monthly payment.

So you pay the minimum balance on all other debts, but pay whatever extra you can on the smallest debt to get it paid off faster. Then, each time you pay off a debt, you add the payment you were making on it to the monthly payment for the next debt you pay off. Each time you pay off a debt, you’re throwing even more money at the next debt down the line. By the time you get to your largest debt, you’re making very large monthly payments.

The Perks: This method is very emotionally rewarding. When you can pay off two or three of your smallest debts very quickly, you’ll get a burst of energy to keep going. And by the time you start slogging through your biggest-balance debt, you’ll have plenty of ammunition to throw at it.

The Drawbacks: Since you aren’t taking interest rate into account, this method can cost you a lot more in interest over time.

Who’s It For? If you really need a kick in the pants to stick with paying down debt, this method is for you. Paying off those first small debts can really make a difference in your long-term perseverance. And if you don’t have any super-high-interest debts, you won’t spend that much more in interest over the long term.

The Debt Avalanche

With this method, you pay off your debts from largest interest rate to smallest interest rate. Pay whatever extra you can on the debt with the highest interest rate, while making the minimum payments on your other debts. When you pay off one debt, you add that payment to the next debt with the next highest interest rate, and so on.

The Perks: Especially if you have high interest rate debts, this method could potentially save you thousands of dollars over the long term. Getting rid of those high interest debts early can really make a difference.

The Drawbacks: If your highest interest debt also has a large balance, you may get discouraged at how long it takes to get going.

Who’s It For? If you know you can stick with paying down your debt, regardless of how long it takes, this is the most scientific, money-saving method to use. And it’s especially important to consider this method if you’re dealing with very high-interest debt.

The Biggest Impact

When you have one or two debts with very high monthly payments, you may want to pay them off first. This is especially true if you’re on a variable income, and sometimes barely squeak by when making minimum payments.

Sometimes with this method you’re not actually paying down a debt; you’re getting rid of it. For instance, if you have a $500 car payment, downgrading your car could seriously lower that payment without going through the work of actually paying it off month by month.

The Perks: Getting rid of one or two high payments can even out your budget. Plus, offloading that $500 car payment gives you a lot more money to throw at your other debts.

The Drawbacks: You may need to actually sell an item to get out of these high payment debts. And if you’re not taking interest rate into account, you’ll probably wind up paying more interest this way.

Who’s It For? If you need to get out from under one particular high payment, consider just selling that item to offload the debt. That starts out your debt payoff with a huge monthly impact. Then you can pay off the rest of your debts using one of the other two methods.

[Editor’s note: As you pay down your debts, it can be helpful to watch your progress as you build credit. Paying down your debt can help your credit in a big way, but making those payments on time also has a big impact on your credit. Keeping an eye on your credit scores can also help you ensure that you’re on the path to meeting your goals. There are free tools that can help you do that, like Credit.com’s Credit Report Card, which updates two of your credit scores every month for free.]

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  • windyhillgal

    I tried the snowball method – but it didn’t work well for me.

    The reason? There are times when a credit card is necessary (reserving a hotel room, renting a car, etc) and the couple cards I use for those purposes have lower balances. So, my larger debts (for example, Discover – at $150 per month toward $4000 balance) is getting paid very slowly while I pay off the balances of $500 or so, only to find that I have to put new charges on them the next month.

    So, starting this month, I will be making big payments on that pesky Discover account while keeping a balance (albeit a low one) on the couple cards I still use. We’ll see how that goes!

  • Alicia Whitehead

    windyhillgal… from what you’ve explained, I would recommend paying down your highest credit card first. This will make the biggest impact on your credit utilization, as well, the smaller credit cards are easier to manage. If your minimum payment on your credit cards with low balances is $25, pay just $5-$10 over that while you focus your efforts and extra money on the large balance. Paying a $2 interest on the low cards is much better than paying $50 on the large balance. Once you have the large credit card paid down to 50% then make a big impact on the smaller credit cards, once those are paid off or at 20% of the limit, go back to the high credit card and work to pay that down to 20%. Once you have these credit cards paid down to 20% pay them off, then utilize only up to a maximum of 30% of the credit limit. This is because that difference between the credit limit and balance accounts for 30% of your credit score. A great utilization is between 1 & 20%, however, 30% is still reflecting worthy. Once you’re over 70% of the credit limit, you are considered maxed out. If you would like any additional information, please do not hesitate to email me:
    I am the office manager and un-official partner of The Credit Care Company, we specialize in helping clients with their credit, debts, settlements, judgments, tax liens, payday loan consolidations, student loan refinances, student loan rehabilitations, as well as advocates of the consumer laws that protect you under the FDCPA, FCRA, and FCBA. Best of luck to you either way WINDYHILLGAL!

  • http://www.Credit.com/ Gerri Detweiler

    It may affect your utilization since the credit line from the closed account will no longer be part of your available credit. It could be beneficial to pay off this loan with a consolidation loan if you can get one. But if it’s beyond your control then do what you can – continue paying on time.

    • windyhillgal

      Thank you for your insight. I have since received a regular monthly statement from them that shows I have a credit line of $4550 and an available balance of $691 – but I am still going to pay it off and unload it. Don’t need the drama. I also sent them a letter requesting that they rescind the recent info they sent to transunion. We’ll see if it does any good…
      Thanks again!

      • http://www.Credit.com/ Gerri Detweiler

        Let us know what happens!

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