Paying Down Credit Card Debt – Part 2
In our first part of this series, we gave you some advice as to how to come up with extra cash each month to pay toward your credit card debt. In Part 2, we’ll help you figure out the best method of organizing your credit cards so that you’re making the best use of your extra cash.
Create a Payment Plan for Yourself
Any time you approach a task that seems difficult, it’s best to make a plan. The more detailed the plan the more likely it is to succeed. When you create your credit card plan, make sure that what you come up with is something you can live with for a long period of time. Depending on your level of debt it can take years to pay off balances and you don’t want to get discouraged. There are two main ways to approach paying down credit card debt.
Note: For either method, first determine the total amount you can pay toward your credit cards each month. This should include all the minimum payments plus the extra that you can apply. In addition to this amount, make yourself a goal of finding an extra $25 a month to add to your getting out of debt project.
- Method 1: Pay down by interest rate. Make a list of all of your debts including minimum payment amounts, balances and interest rates. Put your debts in order based on interest rate with the highest interest rate card listed first. Pay your minimum payments each month on every card except the first card. On the first card pay the minimum plus as much extra as you can afford to send each month. Work on that high interest rate card until it’s paid off, then begin sending the same extra amount to the 2nd card on the list. In order for this method to work, you need to be sure to use all the money you had been paying to the first card (including the minimum amount) when you start paying on the 2nd card.
- Method 2: Pay down by balance. Using the same list you created for method 1, this time sort the list with the lowest balance at the top. Each month send all your bills the minimum payments except the account at the top of the list. The top account gets the minimum plus all the extra you have to send. Once the first account is paid off, proceed to the second account.
While both of these methods are effective, it’s for different reasons. Method 1, paying off based on interest rate, will by far save you more money in the long run because you pay less interest. However, most of the time the higher interest rate cards have the higher payment amounts and it can just feel like it takes forever to make any progress. Method 2, paying off by balance can help people have a sense of accomplishment because accounts will be paid off quickly. However, the higher interest rate cards may end up getting paid off last which means more money was spent in the long run.
Whichever method you decide to use, put it into practice right away. It will be a bit of work but you’ll be happy you did it in the end.