Paying off debt needs a strategy. Without one you can easily get off track. You have cut back on your extra spending and are going to start putting that extra cash towards repaying your debts. But how do you know what debts to repay first?
The first step is to prioritize your debts for repayment. Here’s a quiz for you:
John and Jane have three credit cards:
- $200 owing on a bank credit card at 12% interest
- $600 owing on a gas card at 22% interest
- $700 owing on a department store card at 24% interest
How should they prioritize their debts for repayment? The common answer is “I only owe $200 on my bank credit card, so I’ll pay that one off first, which will leave me with more money to concentrate on my other two credit cards.”
Most financial experts will tell you that’s the wrong answer. You are paying 12% interest on your bank credit card, but 24% interest on your department store card; you are paying twice as high an interest rate on the department store card as you are paying on the bank card, so the correct answer is to pay off the highest interest rate debts first.
If you pay off the credit card debt that carries the higher interest rate first it will cost you a lot less. You will also eliminate all of your debt faster even though it may take you longer to pay off the first debt. The final key? Cancel the cards as you do pay them off so you don’t use them and get back into debt.
If your credit card debts are more than you think you can handle on your own and you need help making a strategy to pay off your credit card debt, our advisors can help you find a solution. Contact an expert today for a free, debt evaluation and find your way out of debt sooner than you think.