Pay highest interest accounts off first
One of the best ways to repay debt and save some money is to pay highest interest accounts off first. If you are carrying several credit card balances you will need to determine where the highest interest rate is and start there on your debt repayment plan. Following the method of paying off the highest interest credit card account first can help you repay the debt and save money along the way.
You have probably read on several sites that you should pay off high interest rate credit card debt first. From a financial standpoint, that's really true. It will cost more to carry a balance on a high interest rate credit card. Because of this the longer you take to pay off the card, the more money it will cost you. There is a dual benefit to using this method since paying off high interest rate debt saves you money and usually lets you pay off the debt faster.
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- Here's an example of how it works for someone who has two credit cards.
- Credit Card A has a $3,000 balance and a 22% interest rate.
- Credit Card B has a $1,500 balance and a 12% interest rate.
Many financial experts argue that you should pay off the smaller debts first regardless of the interest rate. This debt repayment method is often referred to as the debt repayment snowball. Their reasoning is that when small debts are paid off sooner, you will remain motivated to pay off the next debt and the next, until you are completely debt free. The consumer who uses this method pays off the smallest balance first and then adds that payment to another payment to pay off the next smallest balance until all debts have been repaid. While it is true that the smallest-balance-first method will let you pay off some debts sooner in the beginning it comes at a cost. In the example above, under the highest-interest-rate-first method, you would have the first card paid off in 31 months. Under the smallest balance first method, you will have the first card paid off in 14 months. So consumers considering how to repay debt should remember it takes you longer to pay off the debt completely under the smallest-debt-first method. You would have to decide if you need the motivation from paying off smaller debts at the expense of spending more money on interest.
In addition to using the highest interest rate payment method consumers should consider coupling their repayment power with any extra money they have. Monetary gifts and tax returns along with paying down high interest credit cards first can go a long way toward becoming debt free. While it may be tempting to spend that bonus or unexpected windfall consider upping your debt repayment along with paying your high interest credit cards and becoming debt free all that much sooner. Not only will you become debt free faster but it will free up cash that you could be using for a cash reserve.
