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The Fastest Way to Pay off Debt for Good

The Fastest Way to Pay off Debt for Good

Are you living day to day under a mountain of debt? Going through life saddled with debt has a way of draining you and leaving you stressed and anxious about what you’re going to do in the future, and how you will ever get away.

Balance transfers are only a temporary fix on the problem. Paying just the minimum, meanwhile, can leave you with debt for decades — and you’ll probably end up paying up to twice as much as the original balance! Just to emphasize how imperative it is to get rid of your debt for good, starting today, consider this example:

John has $50,000 in debt from balance transfers and credit lines. His debt has a 24% APR and he’s paying the $1,500 minimum due every month. As he pays down the balance slowly, the minimum payment keeps getting lower, as it’s set at 2% of the current balance. If he continues down this path, it will take over 42 years to pay off the $50,000 balance with a total cost of more than $99,000!

Interest is a very powerful weapon, and it’s one the banks are using against you. The interest you pay on your debt dramatically increases the amount you need to pay back. This strategy for paying off your debt for good is very simple: you need only look at the interest rates on your debts and go from there.

 

List Your Debts from Highest to Lowest Interest Rate

Start by preparing a list of your debts from highest to lowest (after tax) interest rate. You’ll probably notice all of the credit cards are at the top, with rates varying between 10-20%. Retail credit cards tend to have the highest interest rates of all, often above 25%.

While you’re at it, check to see if any of your credit cards have promotional periods that are ready to end. Be aware promotional rates can end sooner than promised when you initially enrolled, as card issuers frequently re-evaluate customers.

Mortgage and home equity loans will likely be next on the list. Student loans could appear at the bottom, especially if you qualify for any tax credits that reduce your liability.

Make sure your list covers absolutely all of the debts you pay on monthly, as this strategy won’t work if you don’t consider everything.

You may find it easiest to use a spreadsheet to manage this list for the next step.

 

Make Monthly Minimum Payments to All Debts

Add to your list a column next to each debt, listing its minimum monthly payment. This is the amount you must pay monthly toward the debt, except for the single account at the very top.

Add another column with the payment due date, if it tends to be the same from month-to-month. This is just a good way to help you stay on top of everything.

 

Focus on Your Highest Interest Debt

Here’s where the real pay-off occurs: while making minimum payments to all other debts, focus everything you have on the debt with the highest interest rate. Put all unused money after paying your expenses toward the debt at the top of the list.

 

Repeat!

As each account is eliminated, remove it from the spreadsheet and re-order your list whenever interest rates change. If you have smaller balances on some debts, you may see a few lower down the list start to disappear, too.

This strategy is mathematically the best way to pay off your debt in the fastest amount of time. Not only that, it’s also the strategy that will save you the most money, as you’ll be paying less in interest.

If you have trouble sticking to your goal and you want to see immediate results to keep you motivated, you can use the Debt Snowball method made popular by Dave Ramsey instead. Using this method, you pay off smaller debts first, with no attention paid to interest rates. Just be aware the strategy described above will pay off your debt in the fastest way and save more money.

Many people cite early successes as the biggest advantage to the debt snowball method. You can also create your own motivation by defining milestones for yourself. Instead of celebrating when you pay off your first account, keep track and give yourself a reward when you pay off the first $1,000. Before long, the debt will be behind you and you’ll have a fresh start financially!

About Christine Smith

Christine Smith is an editor and freelance writer. She covers real estate and business news for US Money Ledger.

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