Are you paying off debt the cheapest way? This might sound like an absurd question to you. There is no right or wrong way to pay down debt you say. That’s right of course. The best way to pay down debt is the way that works best for your particular situation.
Paying off debt the cheapest way:
Updated May 2022
The question of effectiveness and saving money can, and should make a difference in how you pay down debt. For as long as l can remember, we were told to pay down the smallest debt balance first, then tackle the next, and so on until you’re clear.
The intention was to get a psychological boost from paying off debt, thereby encouraging you to tackle the others. It’s only been recent that conventional wisdom has changed. Here is a more effective way to pay down debt.
Nowadays, that way of thinking has shifted quite a bit. This is due to a whole range of factors that influence how much debt you have. These include things such as the loan amount, your credit rating, and most of all, the interest rate the credit card carries.
Paying Down Debt The Cheapest and More Effective Way:
The first thing you need to do is write down all of the debt accumulated. Seeing it in black and white will be sobering and even scary, but it needs to be done. Write the amount owed along with the interest rate on the loan.
Do you see where I’m going with this? Let’s look at this scenario for instance using the average U.S credit card balance in 2022 is between $5525 and $5700 (some figures put it as high as $8377) depending on whom you believe, with the average interest rate of 15.59-16.54%.
Some credit card loan scenarios:
A loan balance of $5700 at 15.59% over 36 months is a payment of $195.07 monthly using any free online calculator like this one. At the end of the loan, you would have paid $7,022.52 which nets the credit card company a profit of $1322.52 for their trouble.
Let’s say you have another card with a balance of $2000 at the same interest rate. Over the same 36 months, your payment would be $69.91 monthly and over the 36 months, the total paid would be $2516.76. That means you would have paid $516.76 in interest fees to the company.
$1322.52 minus $516.76 equals $805.76.
This figure is significant because you could have saved this much ($805.76 remaining in your pocket at the high end) by paying down the larger debt first.
The more effective way to manage and pay down the debt is to pay the minimum amount due on the smaller balance and sock all extra money into the bigger balance until that is paid off quicker.
The takeaway is that you need to know your debt and figure out the best way to tackle it. Using a loan calculator, you can figure out how much your debt is costing you in the long run, and use those figures to guide your loan repayment.
Curb your spending: Lower your dependence on debt.
Of course, all this means nothing if you don’t learn to reduce your debt to income ratio. If you keep on adding to your debt, especially in the form of frivolous things, you will keep sinking further into the abyss, and no amount of interest calculation will help. The basic rules will always remain the same.
Paying off debt the cheapest way saves money if you follow these rules:
- Pay down the balance with the highest interest first to save money
- Pay more than the minimum due to cut down on the amount you pay in the long run
- Stop accumulating new debt. Learn to separate your wants from your needs.
Avoid this death spiral when paying off debt the cheapest way:
What you definitely want to avoid is using one of those payday loans to pay off other debt. This is simply asking for trouble. The interest rates are astronomical and they are designed to keep you in debt forever.
I would also be wary of those debt consolidators that promise to negotiate with the companies on your behalf. They ask you to send payments to them directly and they would, in turn, distribute the funds to the companies.
They are mostly scams. You pay them, they pay the companies nothing, and you’re in deeper than ever. Not only are your debts unpaid, but you also lose your hard-earned money.
If you’re lucky enough to find a legitimate company, the fees are often outrageous, and there is often no guarantee to boot. Your loan companies may refuse to work with them. Either way, you’re left holding the bag. Do not enter into agreements without proper interrogation and research. There is no silver bullet to debt repayment, you have to find what works best for you.
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Do you have your own perfected way of tackling debt? Have you any useful ideas or suggestions for people to achieve paying off debt the cheapest way?