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Three Popular Techniques For Paying Off Debts

By Michael Redbourn

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Published: 04Jul2009
Word count: 570
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There are as many systems for paying off debts as there are advisers, but three systems are commonly in use, and we'll take a look at them now, and compare them.

Constant Payments On Every Account.

This is the simplest method and is perhaps the one that used by most people who bother to use any system at all, but it's not very financially effective, and is not recommended.

Using the constant payments system, you continue to pay the same amount every month regardless of how much is requested.

To illustrate why this system is not fiscally very effective, let's imagine a card with a balance of $4,500 and an interest rate of 15%, which would mean payments of around $180 per month, and a second card with a balance of $6,700 at 18% interest, and a minimum monthly payment of $268.

You have a combined minimum payment of $448 and if you don't use either card then each month your principal will be reduced, and after twelve months you will have reduced the amount owing by $110 more than if you had just paid the minimum requested amount each month.

This might look pretty good, but it will take you almost eleven years to pay of the total debt, and you'd have paid close to $,6000 in interest.

The Snowball System.

This system is very popular and very effective, and what you do is to pay the minimum monthly payment on all your accounts, with the exception of the one with the lowest balance.

You pay as much as possible off of the account with the lowest balance and when it's paid off, you do the same with the next account with the lowest balance.

The advantage of the Snowball system is that it provides the quickest way to pay off an account completely, thereby providing a big emotional boost along with the financial savings.

Each time an account gets paid off, the borrower feels like a little more weight has been removed from his or her shoulders.

If you used the same two debts as we used in the Constant Payments illustration above, you'd save $2,800.

Debt Stacking.

This system is without doubt the one that works best financially and if you don't need the emotional boost that the Snowball provides, then it's the one you should use.

It's similar to the Snowball system, but instead of paying as much as possible off of the account with the lowest balance, you pay the maximum off of the account with the highest interest rate.

Paying off the card with the highest interest means that the same debt gets paid off in thirty one months, and the amount of interest paid is only $2,6660 which represents a saving of 11% compared to the snowball technique, and offers a saving of $3,100 compared to the minimum payment method.

Surveys indicate that most people who are trying to get out of debt, do so without using any clearly defined system at all, and compared to that, any of the above three systems is far better.

If you feel that the emotional incentive of getting rid of one account after the other fairly quickly, justifies the financial loss, then go with the snowball technique, but if you really want to save money then use debt stacking.

We only used two debts in our example, but just imagine how much bigger the savings are if you have a lot of big debts on a lot of cards.

The author of this article was a film producer, and award winning film sound editor for many years. He has an interest and natural flare for economics, so if you need a loan but are worried about your credit score, then go check out -> Need Credit Now because if offers a long list of lenders that provide, Auto Loans, Personal Loans and Mortgage Loans, plus Guaranteed Credit Cards to those with bad credit.

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