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Three Approaches to Paying off Debt

Paying-off-DebtToday, many people are not strangers to high-interest credit card debt. The average American household has over $10,000 in credit card debt, and more than 19 million households only make the minimum payments on their debt. Many people have found themselves in the same predicament. It is possible to overcome this burden, pay down your debt and live debt-free.

The road to debt freedom may be a difficult one. The difference between success and failure is having a strategy and developing a plan for repaying your debts. Here are some strategies that have worked for many people.

  • Increase your income. You can work hard for promotions or take on a part-time job. Use the extra cash to pay off debt and not to increase your standard of living.
  • Create a budget. Careful budgeting can turn up areas where you are overspending. You can divert this money to repaying debt.
  • Reduce interest rates. You can try to negotiate better terms with your creditors or transfer your balances to lower interest cards. When you trade high-interest debt for low-interest debt, you are winning.

If you find yourself with significant debt, there are options.

Next, you are going to have to create a plan for repaying the loans. There are three popular and proven approaches to repaying debt.

1- Start with the smallest debt. List your debts in size order from smallest to largest. Each month, you pay the minimum payment an all your accounts. Then you take whatever money you have left for debt repayment and apply it to the smallest account. When you pay this off, you start paying off the next smallest debt. This strategy results in a few quick wins that will keep you motivated to continue with your plan. It can be very satisfying to close an account, and this satisfaction can keep you going. As you continue to close accounts, the money that can be applied to the remaining accounts increases. Once you get the ball rolling with repayment, you will eventually eliminate all your debt.

2- Start with the highest interest debt: Some complain that the first strategy is not the least expensive way to pay off debts. They suggest listing debts in order with the highest interest debts first. The debts with high interest are costing you the most money the longer they remain unpaid. The idea is to go after these debts first. Pay the minimum on each account every month. Then take the rest of the money you have budgeted for debt repayment and put it toward the debt with the highest interest rate. It may take you a while to eliminate this first debt, but you will save money by reducing the total interest that is accumulating.

The one drawback of this strategy is that there might not be any quick wins. It may be difficult to keep motivated without the satisfaction of frequently closing an account. To make up for this, create key milestones to track your progress. You might celebrate after retiring $1000 of debt and then celebrate again after you pay off $2500. These celebrations can keep you motivated to continue moving forward with your plan.

3- Pay off the debt that will most impact your credit score. If you are planning on applying for a loan in the near future, you may want to improve your credit score. Since some types of debt hurt your credit rating more than others, you may want to reduce those debts first. For example, if you are close to your maximum on a line of credit, this will hurt your credit rating. You want to bring all of your credit cards below 50% of their maximum in order to positively affect your credit rating.

Each of these strategies works well to repay debt. You have to decide for yourself which one is the best for your situation. The most important thing is to set aside money each month for debt repayment and start paying down your debt. With a good plan and a bit of discipline, you can get out of debt.

Katie Furniss, MSW, LSW

Phone: (513) 868-3210
Toll Free: (888) 597-2751