Get Out of Debt Guy

What is the Best Strategy to Pay Off Our Debt. - Allen

Posted April 3, 2013

WRAL Reader Question

My wife and I have a few credit cards some with balances around the 150-300 neighborhood and then a couple with balances between 400-700 they all have the same interest rates. We make good money but are confused as to how we start to pay them down.

My question is do we start with the lower balances and clear them out so we can pay down the larger balances. Or do we start with the larger ones and continue to make the minimum payment on each.

Allen

Answer

Allen,

There are two ways to pay off the debt. Each has it's merits. 

One way is to pay off the smallest balances first. This approach gives you the fastest emotional feedback and you quickly see debts disappearing.

The second way is to focus on the highest interest rate first. This will allow you to payoff the debt and pay the least amount of interest. This strategy can be tougher for people that are not good at developing a long term plan and sticking to it until the end.

One approach I like is the free service offered by ReadyForZero.com. This free service will prioritize your debts to pay them off in the shortest period of time without paying extra money. The service helps to apply structure to the math to keep you on track and motivated.

ReadyForZero.com is a neat solution because it gives you online modeling and help about what adjusting your repayment strategy will do and it's worth looking into.

Don't forget though, when you are done paying off your cards, don't close them. If you do you terminate your ties with the length of time you've had the cards and the longer you have a credit card the more that can help boost up your credit score.

Steve Rhode

WRAL Get Out of Debt Guy

If you have a credit or debt question you'd like to ask just use the online form. I'm happy to help you totally for free.

2 Comments

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  • steverhode Apr 4, 2013

    You will find the same problem with all providers unless you list each segment of the debt as a separate item. But then the issue becomes how the payments are applied according to the cardholder agreement. I admit it is a problem to deal with blended balances and rates. The easiest approach is to average the rate based on the percentage of balance on cash advance or promotional versus regular charges.

    Payments are typically applied first towards the lowest interest rate balance. For example, "We charge interest on balance transfers and cash advances beginning on the transaction date. We charge interest on purchases unless you pay your entire balance, which includes all purchases, cash advances and balance transfers by the payment due date each and every month. This means that we will charge you interest on purchases if you do not pay any balance transfers in full by the first payment due date."

  • alyssamerberg Apr 4, 2013

    The only issue I found with the readyforzero.com is that my only credit card with a balance has 3 different interest rates and the site (and many I've looked at) only allow one interest rate and balance. My statement shows me balance for each interest rate and it's difficult to get an accurate time frame on my payoff date. Any suggestions?

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.