How to Pay off Debt: Comparing Popular Debt Reduction Methods
July 16, 2009

We all want to pay off credit card debt, and ideally be debt free. However, what is the best way to get there? I will compare two methods, and give you some feedback so that you can decide which debt plan works for you. Both of these scenarios assume that you are already paying the minimum for all cards, and can afford to pay additional money each month. I probably don’t need to mention this, but if you are struggling to pay the minimums, then that should be your primary focus.

1. The Snowball method works this way:

  • List your debts from the smallest balance to the largest balance.
  • Apply extra money to the smallest balance until it is paid off. For instance, if you have a debt of $150, with a minimum of $10, pay the minimum plus extra payments ($50 for example) until it is paid in full.
  • Use that missing payment amount (the minimum of $10 plus the additional $50 you were paying) to apply to the debt with the next largest balance.
  • When the second debt is paid, use the missing payments from those two debts toward the third.
  • Continue that process to continue to pay more and more towards the largest debts until the last one is paid.

2. The alternate method is to attack the debts with the highest interest this way:

  • List your debts from the highest interest rate to the lowest interest rate.
  • Pay extra money to the first debt until it is gone.
  • Use that missing payment toward the next debt on the list.

Take a look at the calculator I used for an actual comparison between the two approaches:

So, which method is right for you? Obviously, you can save more money by paying off the highest interest rate first. However, if you know that you struggle to stay motivated in your plan to pay off debt, the Snowball method will give you the personal satisfaction of accomplishing smaller goals. Either way, the fact that you are tackling your debt will be your ultimate reward. Click here to use my free calculator to compare these two debt strategies for your situation.

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