Once you have you debt calculated and broken down by what you owe to each creditor you need to determine which payments should take priority over the others. Credit card debt, for example, is a very easy way to string out and grow your debt over years because credit cards typically have very high interest rates. If you have $5,000 dollars in credit card debt and pay the minimum payment each month, which is usually around 2 percent (so we can figure that you pay $100 a month), have you considered how long and how large this debt will become by the end of your payments? By paying the minimum payment every month, if your interest rate is 18 percent, you will take 7 years and 10 months to pay off your credit card and will have added an extra $4,311 to your original $5,000 debt. Minimum payments are how credit card companies make money and how you keep yourself bogged down in debt.
By paying just an extra $50 each month towards this bill, you can pay off your credit card debt in 3 years and 11 months, paying $1,983 extra from interest rates, which is still a lot of money, but a great deal less than if you only pay the minimum amount.
Focus your efforts on the balances that charge the highest interest rates first. For the balances that have high interest rates, you want to prioritize paying these over all the other balances, so while making the minimum payments on the other balances, you want to direct as much money to getting rid of these high-interest balances as you can.
For some people there is a particular debt that is heavy on their minds or that causes a lot of trouble for them due to either family or creditor-related issues. Although this debt may not be the one costing you the most interest, you may want to consider making this debt your highest priority to get the stress of this debt off of your mind. Still other people find that starting with the smallest debt is a helpful way to bring down the number of creditors they have, which can bring a feeling of relief to some people.
While I can understand the reasoning behind these two methods of payment that are different from prioritizing debts by their interest rates and I cannot speak against taking this route, the fact of the matter is that, whether your debt with the highest interest rate is causing you the highest amount of stress or not, this debt is causing you the quickest deepening of your debt. If you prioritize your debts according to their interest rates, you will pay off your debts more quickly than any other prioritization system and will save yourself the most money by preventing the highest interest rates from accumulating more debt than if you pay them off first. Perhaps this method will cause you to get to your most annoying debt third or fourth, but this method will also save you the most money and bring about the quickest, most effective outcome.
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