Two Ways To Pay Off Your Debt Faster

The constant temptation of using credit comes to us every day as we drive by our favorite coffee shops, fast food restaurants and our favorite stores.

Using your credit card is both safe and convenient, but very few think about the cost of those everyday items we purchase with plastic. No matter what your interest rate, the coffee you purchase is going to cost you more with a credit card than it does with cash.  Paying for a quick $2 coffee with a credit card can end up costing you $4, $6 or even $10 over time!

Paying off the debt is not as fun as using our credit cards. Some of us fall victim of paying the minimum, and over time we spend more on interest. There are two methods that can help ease the pain of paying off debt, and to explain these methods a little better, we are going to pretend that we have 3 credit cards, shown in the graph below.

Debt Avalanche

Recommended by many, the Debt Avalanche payment method targets the debt with the highest interest rate and speeds up your repayment schedule to save you money over time. Remember, a high interest credit card with a high balance will just keep tacking onto your balance. Paying the minimum with some of these credit cards will barely scrape the debt you owe, and it will keep you in a hole for longer.

In the example below, it will take us a little over 3 months to pay the Red Credit Card by making payments higher than the minimum.

After we pay off the Red Credit Card, we then shift our focus to the Green Credit Card, and finally the Blue Credit Card.

Debt Snowball

The snowball method targets your credit cards with the lowest balance. By targeting the credit card with the lowest balance, you will pay down those credit cards faster, therefore removing them from your CREDIT CARD DEBT LIST. The point of this method is to motivate you to pay off all of the credit cards on your list with quick wins. These quick wins bring satisfaction of paying off a card and will motivate you to keep up with your ultimate goal. It’s also important to note that because you’re not targeting the higher interest rate first, you will pay more in interest over time with the debt snowball method. This method is great for chopping away your credit card balances, but it’s also important to know what it entails in terms of interest paid over time.

As you can see in the example below, we are targeting our Green Credit Card first, because the balance is the lowest from the three cards.

By focusing on that card, we can have the Green Card paid off in a little over 2 months.

After the Green Card is paid we will shift to the Blue Card, then to the Red Card, keeping it in order by our lowest to highest balance.

Both of these methods are great, especially compared to paying only a minimum balance every month. The best plan to go with is the one that works for you. The most important thing about paying off debt is having a plan. If you have a plan and stick to it, you will be able to pay it off fast and pay little in interest.

About the author:

Carlos Ortiz is a Financial Education Specialist at Jeanne D’Arc Credit Union.

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