Have you ever had to work hard to pay off a debt?
Did you use a particular strategy to pay more money faster?
I have always been very organized and methodical about paying bills and paying down debt but I learned recently that I wasn’t doing it as quickly and efficiently as I could have been!
It certainly makes sense to pay off higher APR rates sooner than a low rate charge card. We know that while some cards have rates that are close to Prime Rate (currently 3.50%), others have promotional rates that are 0% or 1.99% for a set number of months. Still other credit cards, often store cards, charge rates as high as 21%-24%, this is a terrible waste of money!
The best method of course is to have no debt, if you can do that, you are probably not reading this post! No debt is certainly not practical for most people approximately 34-38% of households in America carry some credit card debt. For those households carrying debt on credit cards the average is $15,700. Not every purchase can wait until payday or be purchased with cash, sometimes, some debt is necessary. In this post, I will go through the various debt payoff methods that I have learned about and what has worked best for my family.
In the debt snowball method, you focus on paying off your smallest debt first. It is referred to as snowball because over time the largest payment you are making “snowballs” and gets bigger as you have less debts to pay. Using an example of five debts you are paying, you pay the minimum payment amount on the four larger debts and then focus on the smallest debt. You make the largest payment possible to the smallest debt to pay it off as quickly as possible.
After you have wiped out the smaller debt, you then use that money to add to the payment of the next smallest debt. This makes your payment to this debt even larger and you can pay it off that much faster. This method gives quick satisfaction since you begin with the smallest debt and have the ability to wipe it out in a short period of time.
Changing my method to the debt avalanche strategy has already made a huge difference in my debt payoff and it was noticeable immediately. Not only am I paying my debt off faster, I am paying less of those high APR charges.
For the debt avalanche method, you rank your debts in order of highest to lowest APR rates. If we use the example of five bills included in the debt, you pay the minimum payment on the four lower APR rates. You then focus your attention and largest possible payment to the debt that has the highest APR rate.
This helps you to get rid of the debt that is costing you the most money in finance charges. Like an avalanche, you start at the top with the highest interest rate and your payments grow larger over time as you pay off debts and you debt balance tumbles downward. While you may not pay this first debt off as quickly as in the snowball method, you are saving money by not paying the high APR rates. I have also read about this method being called the ladder or stack method.
In our particular case, the debt we are paying was for a much needed home improvement. We had the price worked into our budget and knew that we could pay part up front and part over the next several months. What we did not expect, is for the total price of the job to almost double! This was due to unplanned and certainly un-budgeted issues like a new septic system, plumbing work and retaining walls. In the end, the house looks beautiful but we need to finish paying off the debt we racked up as a result.
Before I did some debt payoff reading and research, I didn’t even realize there were payoff methods, I just kept paying on time as much as possible. I keep track of all my bills and payments on a spreadsheet and pay close attention to the APR rates that I am being charged. I try to keep the finance rates as low as possible by taking advantage of balance transfer offers. But these offers are only reasonable if the balance transfer rate is not too high and you will be able to pay off the debt before the term ends. If you don’t track the rates carefully, the promotional rate ends and you are back to paying a high APR again.
Although I have paid down debt successfully before, I had no idea that I could pay my debt faster and save even more money.
My personal method had been to make payments that were all a bit above the minimums to all my debts each month. I have these payments set up in my online banking and don’t have to even think about it each month. By setting up automatic bill payments, I am never late on a payment and don’t need to stress about which bill gets paid when. I would then make extra payments to the two or three debts that were charging me the highest APR rates. Using my old method, I was paying down my total debt each month but I still had all five payments to make.
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Changing my method to the debt avalanche strategy has already made a huge difference in my debt payoff and it was noticeable immediately. Not only am I paying my debt off faster, I am paying less of those high APR charges. To stay with the example of five debts to pay (which is what I had), I looked at my payments of my four bills with the lowest APR rates. I lowered those monthly payments to the minimums and took the extra money and directed it to my most unpleasant bill with the highest APR rate. This bill also happened to have a lower balance as compared to the other balances so it didn’t take long to pay off. In just four months, that debt was paid in full! Not only am I no longer paying that high finance charge, I now have all the money that I was using for that bill to apply towards my next bill. In addition to this I did consolidate two debts on one card with a 0% finance charge so I have not lowered my debts to just three.
Being able to wipe out a bill and therefore have fewer payments each month makes a huge difference in our finances. In just six months of restructuring payments, I have been able to pay more debt faster and save lots of money in finance charges as well. There is actually some light at the end of the debt tunnel. By paying attention to my APR rates, focusing on wiping out one bill at a time and making my payments as large as possible, I can see an end to our debt. I have already saved us many months of payments and its possible I will be able to pay this debt much sooner than planned. Then we have more money to direct towards college savings, retirement or maybe a nice trip before the kids begin going to college.
What debt payment method do you use? How have you saved money in finance charges? Organize your bills, check your debt interest rates and pay debt faster!
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