If you’re in debt, you’re not alone! After a decline last year, credit card debt is up again and nearly 1 in 5 Americans have credit card debt of $20,000 or more.
As we covered last week, compound interest can work for us or against us – when we have debt, especially credit card debt, then compound interest is definitely working against us.
While it may take time to get out of debt, it helps to have a strategy. In this post, I’ll share 3 strategies – each is not better or worse than the others, just different. Focus on deciding which one makes the most sense for YOU and then get that strategy implemented.
A very popular strategy is called the debt snowball – the snowball effect refers to paying off the debt. I’ve also come across the idea of our debt piling up on us like a snowball – but that’s not what we’re talking about here.
In the Debt Snowball strategy, you focus on paying off debts in order of the smallest amounts owed. So, every month, you make your minimum payments on the other bills and send some extra to that smallest bill. When that smallest bill is paid off, you send that bill’s minimum payment plus that little extra to the next smallest bill and you keep doing that.
Benefits of this strategy: Works with human psychology. As we see the smallest bills paid off it gives us positive reinforcement, a feeling of progress and we gain more confidence.
Up next is what I’ll refer to as the Old School/Traditional Strategy. This is paying off bills based on the highest interest rate.
Benefits of this strategy will save the most money because the highest interest rate bills will be paid off first but only if you see it through – if follow through is likely to be an issue for you, then consider one of the other 2 strategies.
Last, is a strategy that doesn’t get as much buzz. It’s paying off bills that will give you more breathing room. Having trouble making ends meet? Then you may want to consider this strategy. Put bills in order based on their monthly payment and go after higher payment debts. Of course, some of these higher payment debts so you may need to modify and look at higher payment bills that are in range to be paid off sooner.
Benefits of this strategy: Hello..? Breathing room, ‘nuf said.
Whichever strategy you choose, remember that you’re still meeting the minimum payments on all bills other than the one that you’re focused on paying off. The one exception to this is paying off new purchases that were made on a credit card. This is how you can avoid interest charges on new purchases and it’s an excellent habit to get into if you’re not already in it.