Paying down debt

Credit Cards
KJ: If you are working on paying down your debts to get on the right track to be financially secure, then there are a plethora of resources out there on how to pay down debt. What should you do, where do you start, how do you succeed?

There are a lot of conflicting rules on whether you pay down your lowest balance first (the Dave Ramsey ‘snowball’ method) or pay down your card with the higher interest rate. Like most recommendations, I say: it depends. Sometimes it’s not just a matter of simple calculations when you throw in the curve ball of personal finances and spending behaviors.

Method One: Start with the highest interest
The method that saves you the most amount of interest over time is to pay down the card (or debt) with the highest interest first. This method works best for people who can easily focus on the long-term and are apt not to add to their cards. Sure this may be better for your wallet, but you often have little success if you don’t see the fruits of your labor paying off – especially if you have a large card with a large balance and a high rate that could take months or years to chip away at.

Method Two: Start with the lowest balance
Your debt with the highest interest rate may have a higher balance and thus may take longer to pay down, so you may get frustrated with the progress (or lack thereof) if it takes “too long.” For this reason, Dave Ramsey’s ‘snowball’ effect involves paying down the lowest balance first, then continuing to use the payments to pay the next highest, and so on and so forth. This particular system can be a great way to see results fast, so you can see the fruits of your labor sooner. Hey, I paid off two cards already, let’s keep going! And sometimes, this emotional ‘buy in’ that it helps you accomplish can be far more powerful to get you to consistently pay more and more down on the debts as you can, so you ultimately work your way to the highest balance and can pay it down quicker than you had thought possible! Say you had the following scenario:

    $3,000 credit card with $125 minimum monthly payment
    $2,000 credit card with $75 minimum monthly payment
    $500 credit card with $25 minimum monthly payment

You would start by making the minimum monthly payments to each of the three cards and add all extra contributions toward the $500 card. Once that one is paid off, then you apply any extra payment and that $25 minimum toward the $2,000 card until it is paid off, and so on and so forth up until the $3,000 card is paid off. Then, once complete, start building back up your savings and get back on track, so you can avoid building up debt again in the future!

AJ: I personally hate paying interest on anything. In an ideal scenario, you avoid putting yourself into multiple situations where you owe someone else interest, but if you do need to live on borrowed money and time temporarily, do your research. Ensure that you have investigated all of your credit card options, mortgage options, and car loan options. Consider refinancing opportunities and additional ways to help you minimize the amount of interest you are paying that makes someone else wealthy.

The good thing is…once you pay down your debt, if you continue with your behaviors and direct the amount you previously focused on debt payments to saving, then you won’t have to think about or worry about this issue again! Invest in a software program like Quicken Deluxe 2013. Your wallet will thank you and you’ll help support us a little too 🙂 If you prefer the free method, you might try Ready For Zero.com. I don’t have personal experience with this site, but I would love to hear your feedback!

    Have you paid down significant amounts of debt in the past?
    What method helped you through it?
    If you had it to do over again, what would you do differently?

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4 thoughts on “Paying down debt

  1. As I am in the position of the title of your post, I greatly appreciated the post! I took advantage of the “quick win” by paying off two small credit cards first and not going after the big one! I needed to see, as KJ put it, the “fruits of my labor.” Keeps me motivated! Now, going after the card with highest interest due to long-term benefits.

    I too appreciated AJ’s comment about “do your research.” I think sometimes when we are put in a situation where credit or borrowing is the answer, we just “react” and not think before we act. Loved this suggestion and look forward to paying down the debt.

    Thanks for the post! Great info and great suggestions!

    • Great job on your progress thus far, and keep up the good work. Keep us posted as you’re able to pay off all of those cards down to $0!

  2. The main take-away, for me, is that once you have paid off a card, DO NOT let a balance due creep up on you. This is all too easy to do, which is why some advisors suggest cutting up all of your plastic. I still think this is impractical in the world we live in, but I do think we should limit ourselves to one, or at most, two cards. Ditch the JCP, Kohls, gas cards, whatever! Keep a couple of major bank cards for travel, or earning points (but pay your balance off each month!) and use the shredder on the others. After you’ve officially cancelled them, of course.

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