Every supposed expert, and many amateurs are publishing articles on the web about paying off debts, but there are really only three basic techniques, and we’ll examine their effectiveness and see which might be best for you.
Constant Payments On Every Account.
This is the simplest method and is perhaps the one that used by most people who bother to use any system at all, but it’s not very financially effective, and is not recommended.
Using the constant payments method, you keep making the same payments every month regardless of the amount that’s requested.
To demonstrate why this method is not monetarily very efficient, let’s imagine a card with a balance of $4,500 and an interest rate of 15%, which would mean payments of approximately $180 per month, and a second card with a balance of $6,700 at 18% interest, and a minimum monthly payment of $268.
You have a combined minimum payment of $448 and if you don’t use either card then each month your principal will be reduced, and after twelve months you will have reduced the amount owing by $110 more than if you had just paid the minimum requested amount each month.
This might look pretty good, but it will take you almost eleven years to pay of the total debt, and you’d have paid close to $,6000 in interest.
The Snowball System.
This system is very popular and very effective, and what you do is to pay the minimum monthly payment on all your accounts, with the exception of the one with the lowest balance.
You focus on paying off the account with the smallest balance first by depositing as much to the account as you possibly can each month, and when the balance is zero, you focus on the next account that has the lowest balance.
One major advantage of the Snowball method is that as accounts get paid off quickly, the borrower gets a great feeling of satisfaction, which encourages him or her to continue with the process.
Every time a debt gets completely paid off, the borrower feels as if a little more weight has been removed from their shoulders.
If you’d used the same two debts as we used in the Constant Payments example above, then you’d have saved $2,800.
Debt Stacking.
This system is without doubt the one that works best financially and if you don’t need the emotional boost that the Snowball provides, then it’s the one you should use.
It’s similar to the Snowball system, but instead of paying as much as possible off of the account with the lowest balance, you pay the maximum off of the account with the highest interest rate.
By paying off the creditor that’s charging the highest interest first, you get the debt paid off in just 31 months, and you only pay $2,660 in interest, which amounts to a real saving of 11 percent when compared to the Snowball technique, and a whopping saving of $3,100 when compared to the minimum payment system.
Various surveys suggest the majority of people that are trying to reduce their debts are doing so without any real thought as to how to do it, and choosing any of the above systems would be far better than using no system at all.
If you decide that some financial loss is justified by the emotional motivation, then go with the Snowball system, but if not, then use Debt Stacking and save yourself a lot money and get your debts paid off far more quickly.
It’s worth noting, that we only used two debts in our example, and you can just imagine how much bigger the savings would be if you have a lot more debt and a lot more creditors.
Author-Bio: The author of this article was a film producer, and award winning film sound editor for many years. One of his primary interests is economics, and one of his websites http://get-financial-help.org is for people with bad credit that need a loan. The cost of an extended list of lenders is extremely small, and anyone not getting a loan within 60 days gets a full refund.
