The burden of credit debt sinks marriages, creates constant anxiety, and makes it very difficult to relax and enjoy life. Eliminating debt requires both planning and follow-through. A realistic budget will show how much money is available to pay down credit card bills. Once the commitment to manage credit is made, it is time to create a strategy that will get rid existing debt.
Millions of people carry debt from many sources—store cards, a bank line of credit, traditional credit cards, payday loan services, etc. There are two main ways to go about paying them down:
• Pay down the highest interest rate debt first.
• Pay down the smallest debt first.
Paying the highest interest rate debts off first makes sense by the numbers, but many people find that the satisfaction of removing a creditor early in the process makes it easier to stick to the lifestyle changes necessary to stop whipping out the credit cards and start paying them off.
Payday loans and store cards usually have the highest interest rate. Typical payday loan rates have an annual interest from 390 to 780%. So high, in fact, that Ontario and many other provinces and states are passing laws to reduce the amount that can be charged. “No money down until” deals are tempting, but it is a rare buyer who sets aside the cash to pay the full amount back when it comes due. At that point, high interest, often backdated, kicks in. At $300 per year in interest, that $1000 bedroom set quickly becomes expensive. It’s easy to see why paying off high interest loans first is the most logical thing to do.
On the other hand, many find it easier to pay down the smaller loans first, even if they have lower interest rates, as the sense of accomplishment makes it easier to stay on track. It may take a little longer to become debt free, but the chances of success are much higher.
Either way, the roll-over is the best method to use when paying down debts. Aadila, an Ottawa civil servant who found herself deep in credit card debt as a result of impulse spending after buying a condo, explains her process. “After I did my budget and decided which spending areas to cut back in, I had an extra $300 a month. I paid the minimum balance on my cards (failure to pay minimum balances on time has a negative impact on credit ratings) and then put the extra against my Bay card, which had the smallest balance and a minimum monthly payment of $32. I paid that off in less than two months and it felt great. Now I had $332 a month to pay off my new living room couch and coffee table, which took 4 months—then I had $503 to put against the next debt. I can’t believe how quickly I’m paying off my debts, although I have to keep reminding myself not to buy new things!”
Resources:
How to make permanent, positive changes in life
Credit Canada.com
The video where A few smart cookies help up us save some dough
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