The Fastest Way Out of Debt

By | Apr 9, 2009
wallet
Creative Commons License photo credit: mangpages

Suppose you find yourself in this all-too-common situation: multiple credit cards (perhaps maxed) and loans, recently unemployed or perhaps just barely employed. Every last dime you make goes toward paying the minimum balance on your bills and feeding your family – more often than not you run out of money before you run out of month.

When you finally do have a bit of extra cash to pay down, what do you do with it? The most obvious answer is to pay down some of the debt with the highest interest rate. If you pay $100 on a credit card with 25% interest, you save $25 in interest payments over the next year. If you were to put that same $100 on a line of credit with 6% interest, you would save only $6 over the same time. Pretty obvious, right? Not really – you end up saving less than $2 per month.

If you’re in this situation your best way to get out of debt is to make use of what is called the “snowball” method of debt reduction. What this means, is the $100 you have extra goes onto the debt with the lowest balance. Yes, you will pay more in interest over the longer term; however, you will find yourself in a situation where a larger number of small debts are paid off relatively quickly, meaning you have fewer minimum balances to maintain.

Every time a minimum charge drops from your monthly expenditures you will have more money left over to pay for the next lowest debt. The effect: your cash payments snowball into larger and larger sums that make the bigger debts disappear faster. Fewer total debts mean fewer debts to service every month.

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