By Wendy Clay on November 22, 2011
.jpg.aspx?width=75&height=75) When it comes to paying off debts, there are multiple methods of doing so, but each has slight differences. In this article we will discuss some of the most popular methods of debt elimination and examine some of the benefits and drawbacks associated with each method.
The first method of debt elimination we will be discussing involves focusing on the balance with the highest interest rate. The idea is to pay the minimum payment on all other debts while paying as much as you can afford towards the balance with the highest interest rate until that balance is completely paid off. Once that debt has been paid off, you then begin the process again for the balance with the second highest interest rate, and continue to do this until all of your debts are paid off. Many financial advisors promote this method of debt elimination because it decreases the amount of money you pay on interest in the long run and can eliminate debt quicker than many other methods.
An alternative to the above method uses the same general idea—pay the minimum payment on all debts except for one and make the largest payment you can afford on that debt—but applies it to the smallest balance rather than the balance with the highest interest rate. This method of paying off the smallest debt then moving on to the next largest debt takes more time than the method above and essentially costs more money due to the interest that will be accrued on debts with high interest rates but can be a very motivating method as you will quickly be able to see results as you eliminate your smaller debts. This quick elimination of smaller debts also makes it a great option for people with a large number of debts that they find difficult to managing properly, as the number of payments they will have to monitor and pay will decrease as they pay off smaller debts. Also, once some of the smaller debts have been eliminated, it is always possible to convert to the first method mentioned.
If your debt amount is more than you will ever be able to pay off, there are also options such as debt settlement and credit counseling. Debt settlement, which can be done independently or with the assistance of a debt settlement company, allows borrowers to negotiate with their creditors to have a portion of their debt forgiven. They can then pay the remaining amount in one lump sum or over a period of time designated in a repayment plan. Credit counseling on the other hand enables debtors to reduce the interest rates on their credit card to 0-12% on average.
If you are struggling to make multiple monthly payments as mentioned above, another option for debt elimination is debt consolidation, but borrowers must be very cautious when consolidating debts. Some forms of debt consolidation, such as debt consolidation loans, require borrowers to further entrench themselves in debt and often call for collateral such as one’s home. A better option for debt consolidation involves debt management plans, as they don’t require you to take on more debt before getting out of debt.
These are a few options for eliminating debt, but regardless of the method you choose to eliminate your debt remember:
- Make realistic payment amounts that still allow you to make other necessary payments and purchases (typically debt payments should not total more than 10-15% of income).
- Stick to your plan, and don’t be enticed to decrease the total amount you invest in debt elimination as your debt amount decreases.
- DON’T IGNORE YOUR DEBT PROBLEM
Sources:
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Lazarony, Lucy What Debt to Pay off First. Bankrate, Inc., 12 Jan. 2001. Web. 3 Nov. 2011
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Pay off Your Debt - Your Guide to Becoming Debt Free. Pay-Debt-Off.com, 2010-2011. Web. 3 Nov.
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The Correct Way to Pay off Personal Debt: The Debt Avalanche. Consumerism Commentary, 28 July
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Ways to Pay Back Your Credit Card Bills. Paying Paul, 2011. Web. 3 Nov. 2011
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