Two Approaches to Paying High Interest Debt
The conventional wisdom when it comes to paying off debt has been that you should pay off debt with the highest interest rate first. Most people pay the highest interest rates on credit cards.
This process involves paying the minimum every month on all revolving credit except for the one that carries the highest interest rate. On that loan or credit card, you should pay as much as you can to bring down your average daily balance and eventually pay off all of what you owe. The reasoning behind this approach is that by getting rid of high interest debt first, you'll pay less over the long haul.
Sometimes this approach involves consolidating high interest loans and credit card debts into a personal loan because personal loans have lower interest rates than credit cards. Over a period of two to five years you'll pay off all your high interest debt. Theoretically this sounds like a great idea, but borrowing to cover other debt rarely works out well. Too many people get a personal loan, pay off their credit cards, and immediately start using them again. It's easy to fall into a downward debt spiral unless you're very disciplined.
Another problem with this traditional approach is that it takes a long time to see results. People with massive credit card debts usually aren't too good at waiting around for things to get better. It's not easy to console yourself for refraining from buying an expensive pair of boots with the thought that in two to five years your improved finances will be worth the sacrifice.
Another approach to getting high interest debt under control is to pay off the smallest loan or card first. Some people call this the 'snowball effect.' You tackle your smallest debt first, dropping 'snowflakes' of extra payments until it's paid off. This usually doesn't take the two to five years that the traditional approach does, so you'll have the reward of being free from one of your debts much sooner.
The reason this approach works well is that once you pay off one debt, you have this great sense that you can handle your debt problem, so you're more psyched to tackle the next debt. With discipline, you'll see your debt disappear chunk by chunk, rather than altogether at the end of several years.
The basic steps are that you pay the minimum on all your high interest debts except for the smallest one and don't think about interest rates at this point. Put all your extra money against that debt so you can pay it off as quickly as you can. Once that debt is paid, you move on to the next smallest and do the same thing until it's paid off.
The 'snowball' approach to paying off debt is a good alternative to those who are averse to taking out a personal loan. The rewards come quicker, and they motivate you to continue with your good habits.
This process involves paying the minimum every month on all revolving credit except for the one that carries the highest interest rate. On that loan or credit card, you should pay as much as you can to bring down your average daily balance and eventually pay off all of what you owe. The reasoning behind this approach is that by getting rid of high interest debt first, you'll pay less over the long haul.
Sometimes this approach involves consolidating high interest loans and credit card debts into a personal loan because personal loans have lower interest rates than credit cards. Over a period of two to five years you'll pay off all your high interest debt. Theoretically this sounds like a great idea, but borrowing to cover other debt rarely works out well. Too many people get a personal loan, pay off their credit cards, and immediately start using them again. It's easy to fall into a downward debt spiral unless you're very disciplined.
Another problem with this traditional approach is that it takes a long time to see results. People with massive credit card debts usually aren't too good at waiting around for things to get better. It's not easy to console yourself for refraining from buying an expensive pair of boots with the thought that in two to five years your improved finances will be worth the sacrifice.
Another approach to getting high interest debt under control is to pay off the smallest loan or card first. Some people call this the 'snowball effect.' You tackle your smallest debt first, dropping 'snowflakes' of extra payments until it's paid off. This usually doesn't take the two to five years that the traditional approach does, so you'll have the reward of being free from one of your debts much sooner.
The reason this approach works well is that once you pay off one debt, you have this great sense that you can handle your debt problem, so you're more psyched to tackle the next debt. With discipline, you'll see your debt disappear chunk by chunk, rather than altogether at the end of several years.
The basic steps are that you pay the minimum on all your high interest debts except for the smallest one and don't think about interest rates at this point. Put all your extra money against that debt so you can pay it off as quickly as you can. Once that debt is paid, you move on to the next smallest and do the same thing until it's paid off.
The 'snowball' approach to paying off debt is a good alternative to those who are averse to taking out a personal loan. The rewards come quicker, and they motivate you to continue with your good habits.