Getting out of debt can be one of the hardest challenges that the American family faces today. Fears of unemployment, rising costs, shrinking paychecks and fewer options can cause large amounts of stress in the average consumer. All of this stress continues while credit card debts soar, interest payments rise and the family budget gets tighter and tighter.
There are three main theories on the best way to help pay off credit card debt.
Pay Off Large Balances First
One of the options talked about in the media is to pay off the largest debts first. These debts take the most time, having the highest stress load, and cost the most money per month. Applying additional money to these accounts each month helps the balance to drop more quickly. Since these debts are larger, it takes a long term commitment with long term planning to achieve this goal.
Some consumers will get discouraged that the debt doesn't go away fast enough, giving up on trying to tame their debt problem. The benefit of this strategy is that once the larger debt is paid off, it frees up significantly more of the family budget for other expenses.
Pay Off Small Balances First
This strategy involves paying off the smallest balances first. The idea is that by paying off small debts, you are motivated to continue paying on the other debts. It is an achievement based system of paying off debts. Once each smaller debt is paid off, the same amount spent per month is applied to the next smallest credit card balance.
The idea is that the you will be motivated by the success of paying off each bill, it will focus your efforts on the other debts in their lives. This strategy has been talked about by several prominent financial planners and analysts, making it one of the more common strategies used by people facing significant credit card debts.
Pay Off Highest Interest Rates First
This third strategy takes some research on your part, knowing what each card charges per month in interest. The higher the interest rate, the more money should be paid towards this account. The idea is that by paying down the highest interest rates, you will save more money in the long run. This strategy does not look at the balance of the accounts.
Since interest is charged monthly towards the unpaid balance of the credit card debt, this path does save money over time. It is one that takes some effort to keep track of, as interest rates fluctuate over time. As with the other two methods, the money spent on the highest interest rate is then applied to the next highest rate when the debt is paid in full.
If there are two accounts with the same interest rate, you can split the amount between the two, or apply it to the largest balance, as that will generate the most savings over time.
Pay Minimum Payment Plus Interest Charged
This last strategy is less common amongst debtors. It is the product of debt collectors working in the industry. The idea is that for every credit card, there is both a minimum payment and an amount charged in interest. For the average debtor, the amount of interest is nearly half of the minimum payment. Making a $50 minimum payment on an account with $25 charged in interest per month only brings the balance down by $25. This keeps you paying on the account for a long time, helping the credit card companies make money.
What the debt collectors noticed was that if you pay the minimum payment and the interest charged together, it was like making a double payment without paying the minimum payment twice. Using the same numbers as above, a $50 minimum payment with a $25 interest payment means you'd pay $75 on that account, for a $50 reduction on the account. The following month, the interest would be calculated at a lower rate as the balance would be smaller.
While not everyone can afford to make that sort of payment on every credit card, even making a payment of minimum payment plus $10 per month will help reduce the balance of the account over time. As with any debt, the more you can afford to pay, the faster the debt reduces. This strategy was used by debt collectors to attempt to help you pay off the balance a few months faster without having to make tough sacrifices.
Dedication, Focus and Repetition
No matter which debt reduction strategy you choose, the key lies in you. You must have the focus to keep with whatever method you choose. The more you can pay, the fast a debt disappears. No one knows your habits and your family budget better than you do, meaning you are the only one who can get yourself out of debt. The above mentioned strategies are ones that have worked in the past for other people. If you find your own method that works, we'd love to hear it and share it with other people, just like you.
Keep focused, keep your budget in line and keep making your payments. Eventually, you'll look back and wonder what you were so worried about.
Shannon Webster - I have over a decade of experience working with government and financial companies. I enjoy politics, sociology, technology and ...
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