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Your Best Debt-Repayment Strategy


Are you drowning in consumer debt? Well, even if you're not, chances are that the water level is getting a bit too high for comfort. Interest charges, late fees...everything seems overwhelming as your balances climb higher with each passing month. We know you'd like to escape before it's too late, but how exactly do you begin?

First, Plug the Hole(s)
Are you still using credit cards? Let me rephrase...are you still using credit cards AND NOT PAYING THEM OFF EVERY MONTH? If so, then you must first realize that it's nearly impossible to eliminate debt while you're simultaneously making charges. Back to our original metaphor, it's like trying to set sail with a giant hole in the boat.

Review your expenses and compare them to your income. Are you spending more than you're earning? Even if you use credit "for emergencies only" (and a new outfit for this weekend is not an emergency), you must begin by plugging the financial leaks in your budget.

As your spending becomes more seaworthy, look for ways to reduce your expenses to the point where you create a cash surplus each month. What categories do you spend the most in each month? Food? Entertainment? Clothes? Focus on spending less by implementing creative solutions. Cook at home more. Invite friends over instead of going out for expensive drinks. And find a second hand store. There ain't nothing wrong with second-hand Gucci!

Line up your Ducks
List all of your credit card debts and personal lines of credit (don't include your mortgage, student loans, and/or car loan). Then, rank them based upon interest rate from the highest rate charged to the lowest. I assume you're current with all of your accounts (including the unlisted ones). If not, then you'll likely need some help with credit analysis and repair.

Once all your debts are current, make the minimum payment on all of them and direct any surplus toward increasing the payment against the debt with the highest interest rate. As the minimum payments required on all your debts start to go down (as happens with credit cards), don't pay less on your total debt. Instead, make the minimum payments on all of them and keep shifting the "extra" to increasing the payment on the debt with the highest interest rate.

Take Your Best Shot
Once that debt with the highest interest rate is paid off, add the amount of the payment you were making toward it to what you're paying on the debt with the next highest interest rate. Once again, as the minimum payment requirements on other debts with lower interest rates decline further, put the "extra" created toward this highest-interest debt.

Because the amount you pay toward each debt increases in size as you move down the list of your debts, this repayment strategy is often referred to as snowballing.

Another Approach
Some snowballing methods recommend that you pay off your debts starting with the smallest balance first, regardless of its interest rate, and also apply to this debt any surplus, while keeping your payments the same each month on all of the rest of your debts (regardless of their decreasing minimum requirements). While this approach offers the psychological satisfaction of paying off smaller debts quickly and paying extra against the principal on all your debts, it may not save you as much in total interest charges as the approach outlined above.

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