Where to Begin When Paying Down Debt

Are you ready to tackle your debt but unsure how to begin? There are quite a few strategies for eliminating debt. The “best” one for you is the method that most suits your personality, lifestyle, and habits.

What the following techniques have in common is that you’ll make the minimum payment on every account except one, which you’ll pay off as fast as possible. As soon as you’ve eliminated the first debt, you’ll move to the next, based on your chosen approach.

Debt Elimination Stategies

Start Small & Build Momentum

When you need to clean the house, do you start with the least messy room? When you look at your daily to-do list, do you start with something you can quickly and easily knock out? If so, this may be the strategy for you. Eliminating the debt with the smallest balance can build energy. It can give you the momentum you need to keep going, to become blissfully debt-free.

Using this method, you’d start by paying off the credit card with a $300 balance. Next, you would tackle your $1,500 student loan.
Then, you’d start chipping away at the $5,000 you still owe on your car.
And, finally, you’d address that $9,000 credit card balance.

Increase Your Monthly Cash Flow

If you pay off the account with the highest minimum monthly payment, you’ll increase the cash available in subsequent months. That extra cash will allow you to pay down your other debts more quickly.

Using this method, you’d start by paying off your car, since the payment is $370. Next, you would tackle your student loan, with its $240 payment.
Then, you’d start chipping away at the credit card with a $70 minimum payment.
And, finally, you’d address that credit card with the $30 minimum payment.

Get The Biggest Bang for Your Buck

Do you wince at the idea of how much of your hard earned money is being lost to interest each month? If so, consider tackling the debt with the highest interest rate, first. In the end, this approach will save you the most money.

Using this method, you’d start by paying your highest interest (22%) credit card.
Next, you would tackle the other (18%) credit card.
Then, you would pay off your (8%) car loan.
And, finally, you’d address that (5%) student loan.

Caveats & Considerations

Avoid Striking Out

It’s a good idea to prioritize any account that is at risk of being penalized, either through a fine or by having your interest rate raised, due to previously missed payments. Once you’ve taken care of that debt, return to your chosen strategy.

Eliminate “Bad” Debt

Not all debt is considered equal, at least not when it comes to your credit score. For instance, loans with shorter terms, lower interest rates, or those that are seen as having the potential to increase your wealth over time (like a small business loan) are seen as “good” debts. Or, at least better debts…

Loans with high interest rates, variable interest rates, longer terms, or that finance assets that will depreciate (loose value over time), on the other hand, are considered “bad” debt.

If you are concerned about your credit score, consider eliminating “worse” debts faster.

Find Peace of Mind

There are some debts that make us a little sick to our stomach each time we look at them. perhaps they relate to an outdated identity, or a major financial mistake. Regardless of the reason you kick yourself over a debt, you’ll probably want to eliminate it quickly, so you can move on with your life.

Note that, when using these caveats, you might end up paying down debt in the same order as someone seeking to build momentum, tackle high interest rates, or increase their monthly cash flow, only for a different reason.

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