Paying down debt is something we all want to know more about. How can we do it faster and in a way that is manageable? Carol Riggles, IHA’s Homeownership Program Manager, has two ways to pay down your debt faster!
There are two great ways to pay down debt faster. One way suggests that you should choose the credit card with the lowest balance and pay it off first and the other way recommends that you choose the card with the highest interest rate to pay off first. Both methods expect you to continue paying the same monthly payment regardless of whether you are required to do so, and both also assume that you are not still using the cards. (Keep in mind that you should use a credit card at least once a year to keep the account active, but only charge something for $10 or less so that your goal to pay off your balances stays on course!)
Here is how it works:
Method One – Select card with lowest balance.
- Pay minimum payment on all cards except this one and pay as much as you can afford each month until it is paid off.
- Then start doing the same for the next card with the lowest balance, but now you are adding the monthly amount you were paying on the paid off card to the amount you are required to pay.
- For example – Card One has a $400 balance and an interest rate of 17% and you can afford to pay $60 a month. Card Two has a $1,000 balance and a 21% interest rate and the minimum payment is $30. Card One gets paid off in about 8 months, and then you start paying $90 a month to pay off Card Two. The balance on Card Two is now about $894 and paying $90 a month will take 12 months to pay off the debt completely. The whole process took 20 months.
Method Two – Select the card with the highest interest rate.
- Using the same examples as in Method One, Card One has a $400 balance and an interest rate of 17% and a minimum payment of $30. Card Two has a $1,000 balance and a 21% interest rate and you can afford to pay $60 a month. In 15 months, Card One is paid off and then you add the $30 to the $60 you are paying on Card Two, and 4 months later you are paid off completely and you have $72 to put into savings because the balance on Card Two was only $18 on the 19th payment.
- You are accustomed to paying $90 a month, so start adding this amount to your savings every month to build up an emergency fund so you won’t have to reach for your credit card as often!
There are lots of calculators online to help you with your calculations.
Building your credit and paying down your debt can assist individuals on their pathway to homeownership!