Getting Rid of DebtA whole lot of people in this country have a whole lot of debt. Given that, it is likely that many of my readers fall into this category. The other day a client asked me what the best way to pay down credit card debt. The answer is that there is more than one answer.
One way to do it will make sense to the engineers and accountants out there. It’s also the one that you’ll find in most books on the subject. This is because it will result in you paying the least amount in interest.
Line up your credit cards from the one with the highest interest rate to the one with the lowest one. Pay the minimum required on all but the one with the highest interest rate. Then use the extra cash you have each month and apply it to the highest interest rate card.
This first method works great in that it is technically the best out there. But technical perfection forgets one thing: we’re not robots, we’re humans.
Taking that into consideration, another common method, and one that is gaining popularity due to it being championed by Dave Ramsey, has you line up your credit cards again. This time you do it from the card with the lowest balance through the one with the highest balance.
Here, as before, you make minimum payments to all the cards. With your extra money instead of applying it to the one with the highest interest rate you apply it to the one with the smallest balance. That gets a card paid off quicker, which gives you emotional gratification. The argument is that while it costs a little more in the way of interest, it has the best chance of having people stick with the program.
There’s also a hybrid method out there. It deals with emotions and with interest. Likely you have a debt or two that really bugs you. Maybe it’s for an appliance that ended up being a lemon. Maybe it is the smallest debt out there that you’d just like to see go away. It could even be a personal loan from a family member with no interest at all—but it really bothers you to have that debt between the two of you.
In this hybrid method, you pick out the debt that bugs you the most and pay it off first. Keep doing this until all that remains are the generic debts that have not emotional pull on you. Then you start on the highest interest debt you have remaining and start paying off the rest.
Which method you use doesn’t matter as long as you use it. So instead of examining it with a calculator, ask yourself which method feels best to you and use that one. Somehow I think it’s more likely you might follow through and do it.
Want to get some personal advice? Want to get it free? The first full week of October is Financial Planning Week and to celebrate, on Monday, October 5, I’ll be giving free advice to anyone who wants to listen. Find out the details on my web site (contact information below).