Debt Payment Strategy
Deciding On The Order To Payoff Your Debts
Once you committed yourself to getting out of debt, you have to decide in what order you want to
payoff your debts. The order that you address each of your debts should be based on your short-term
goals and your own particular financial situation.
Make At Least The Minimum Payment On All Your Debts
In order to avoid late fees, interest rate hikes and damage to your credit rating it is critical
to make at least the minimum payment on all of your bills. Some credit cards will hike your interest
rate to 30% for just one late payment. Some companies will hike your interest rate if you are late
paying one of your other bills. If you ever hope to payoff your debts, I can not emphasize enough
the importance of staying current with your bills.
Once are comfortable that you can make at least the minimum payment on all your bills, use any extra
money to increase your payment on just one of your debts. This focuses your effort on one particular
debt and will help motivate you as you see that balance quickly dropping.
Getting Out Of A Financial Squeeze
If you are in a tight financial squeeze and have several bills with large balances, you may want
to adopt a debt payment strategy that gives you some financial breathing room by reducing your required
minimum payments. Some debt payments are based on your remaining balance (credit cards & home equity
lines of credit) and other payments are fixed (car loans, fix rate mortgages). You can reduce your
required monthly payments by paying more toward the bill that has the highest minimum payment as a
percentage of the total debt that also has a payment based on the outstanding balance. As an example,
if you owe $5,000 each on three credit cards and the minimum payments are $200, $300 and $400, pay
more toward the debt with the $400 minimum payment. Why? The minimum payments are 4%, 6% and 8% of
the balances due respectively. If you paid an extra $1000 toward the credit card bill with the $400
minimum balance, your minimum monthly payment would be reduced by $80 (8% of $1000) versus $40 and
$60 for the other credit card debts.
Eliminating Payments
If you have a lot of bills with low balances and hate seeing all those bills in your mailbox, your
debt payment strategy may be targeted toward eliminating payments. To reduce the number of payments
as quickly as possible, pay extra toward the debt with the lowest balance. For example, if you have
debts with outstanding balances of $200, $300, $500, $2000 and $4000, using an extra $1000 to payoff
the $200, $300 and $500 debts would completely eliminate three payments. This debt payment strategy
is a great way to motivate yourself and help drive you toward the goal to payoff your debts.
Paying As Little Interest As Possible
If the interest rates on your debts vary considerably and you hate seeing all the money you waste
on interest payments each month, your debt payment strategy may involve paying as little interest
as possible. To keep your interest payments to a minimum, pay extra toward the debt with the highest
interest rate. As an example, if you owe $5,000 each on three credit cards and the interest rates
are 12%, 16% and 21%, pay more toward the debt with the 18% interest rate. Why? Paying down that debt
would save you $210 in interest payments over the next year versus $120 and $160 if you paid down
the other debts. If elect to use this debt payment strategy, keep track of the amount of interest
you pay each month. This will help keep you motivated as you see the decline in the amount of money
paid in interest each month.
Which Payment Strategy Is The Best?
Your own particular situation will dictate which debt payment strategy is the best for you. If you have been late with a credit card payment and they have jacked up your interest rate to 30%, you probably should be focused on paying off that debt first. If you owe $100 each to a dozen different department stores, it would make a lot of sense to start paying them off one by one to get rid of all those payments. Regardless of which debt payment strategy you choose, keeping track of your progress will help keep you on track and motivated toward the goal to payoff your debts.
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Debt Payment Strategy
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