One way to maximize the value of your dollar while paying off debts is to target where each of your dollars goes. The most efficient way to do this is to focus as much of your money into paying off the principal and try to minimize the amount of interest you are paying - by paying off your highest interest rate balances first, or transferring your high interest rate balances to a lower interest rate card.
If you have multiple credit cards and loans, take a look at each bill and prioritize them in order from highest interest rate to lowest interest rate. Pay the minimum for each bill except the one with the highest interest rate. For the debt with the highest interest rate, pay as much as you can each month.
Once you finish paying off the account with the highest interest rate, or are able to transfer that high interest rate balance to a 0% or low interest card, focus all of your resources into paying off the account with the next highest interest rate.
Repeat this process - and try to focus all of your financial resources on paying off one bill at a time.
Taking this approach will consistently reduce your debt’s average interest rate because you are consistently paying off the balance with the highest interest rate (or transferring it). And over time, it will help you build momentum toward eliminating all of your debts because you will be able to use a larger and larger percentage of your financial resources to put toward the principal of your balance and not just interest.
This will allow you to minimize the amount of interest expense you have to pay by focusing all of your financial resources on the debt that is costing you the most in interest each month.
July 9th, 2007 at 12:51 pm
The best think is not to have debbts at all. Make money first invest them save them and than buy what you need.
July 11th, 2007 at 12:30 am
It is amazing that the average home has over $8000 in credit card debt alone. Being debt free is where it is at. Less stress dealing with all those bills. Cut up those cards and throw them away if you are unable to stop charging.
I drove old cars and fixed them up and sold them for what I had in them for several years. I did without other things so I could pay off my school loans. Boy was it a relief to be done with them.
July 17th, 2007 at 12:59 am
I don’t agree.
Pay off the debt that has the highest interest AMOUNT first, not the highest interest RATE. If you have two credit cards, and one is 9% and one is 24% you may have a huge balance on the 9% one and the 24% may be alot lower. You could very well be paying less on interest on the 24% card. If you were to work hard to pay it off first you are still paying all of that money on the 9% debt.
xoxo
Patrick
http://stopdoingnothing.com
July 17th, 2007 at 5:06 am
I agree to first comment, no debt is best anyway.
July 25th, 2007 at 9:27 pm
You are absolutely correct. I would also recommend consolidating as much of the balance as possible on the lowest rate card when you get started as well.
September 11th, 2007 at 9:05 pm
Debt needs to be eliminated as soon as possible. We all have to borrow money from time to time. Paying interest is wasted money, the longer you pay it the more it costs you. Start today, and begin by increasing your debt repayment as much as you can.
December 7th, 2007 at 11:20 am
I totally disagree with the idea of paying off the highest interest first. Why, because it is harder to pay these off. The high interest you pay makes it harder to pay off the principal. You should pay off the card you can clear the quickest and then roll that amount on to the next card that will pay off quickest and so on. This method will clear your debts years earlier.
February 5th, 2008 at 3:50 pm
Of course debt free is the best way..
but if you are not debt free, I agree, the best way to get there would be to pay off the lowest balance first, then you have that minimum to apply to the next card.
IE
Card 1: $2,999 22% interest minimum 100.00
Card 2: $ 500 13% interest minimum 30.00
Card 3: $ 700 16 % interest minimum 37.00
I totally made these up for my example, but if you pay just the minimum it won’t come down. If you are able to put an extra 100.00 towards the $500 , it will be paid off in 5 months and then you can apply the extra towards the next..
That $30 turned into $130 for the first card, then $167.00 for the next card…
Then $267.00 for the last.
If you only pay minimums to all three you are just throwing money away..
I hope that helps.
February 9th, 2008 at 9:32 am
Using your examples:
Card 1: $2,999 22% interest minimum 100.00
Card 2: $ 500 13% interest minimum 30.00
Card 3: $ 700 16 % interest minimum 37.00
The best thing to do would be:
(a) transfer the $2,999 @ 22% balance to a 0% or low interest rate card
(b) pay the minimum on the $500 balance (card 2) while paying off as much as you can of the $700 balance (card 3) each month
(c) once the $700 balance (card 3) is paid off, focus all of your resources on the $500 balance card (card 2)
(d) once card 2 is paid off, focus all of your resources on paying off the card 1 balance (since it is now at the lowest interest rate)
I agree that if you only pay the minimums on all accounts you are wasting money.
When I say to pay off the highest interest rate first, you pay the minimum on the other cards while you focus as much of your financial resources as you can to pay off the balance with the highest interest rate. I say this because the highest interest rate balance is costing you the most in interest each month. In order to reduce your interest payments you either need to pay off that balance or reduce the interest rate by transferring the balance to a 0% or low interest card.