Paying off debt opens up more of your income for savings, investing or enjoying, without racking up unnecessary interest charges. Buckling down now will also set you and your sweetie up to enjoy a healthy financial standing later in life, which can be especially helpful when you want to purchase a home or have children. Choose a method that works best for your current financial standing, where you want to be financially and the time frame you're working with.
First Things First
Put yourself on a steady budget before worrying about paying off your debt. If you spend more than you bring in each month, your debt will act as a revolving door. Instead, trim your budget and cut all unnecessary expenses. Put at least $1,000 in a savings account to be used only for emergencies, such as unexpected car repairs. Write down the name of each debt, the amount owed, the interest rate and minimum monthly payment so you know exactly where you stand with each debt. Put every excess penny you have towards paying down your debt using the strategy that works best for you.
From Smallest to Largest
Financial guru Dave Ramsey advocates the "snowball" plan. Essentially, you pay your bills off one by one, beginning with the smallest balance, while maintaining minimum payments on your other accounts. For example, if you have five credit cards with balances ranging from $500 to $5,000, you'd pay off the card with a $500 balance first, followed by the next lowest balance. Pay off the account with the highest interest rate first if two accounts have similar balances.
This strategy works best for people who have multiple accounts and need to see quick results. Crossing off one bill or monthly payment seems to make your situation look better and creates a feeling of success or confidence. Then, you'd tackle your next smallest balance by paying that account's minimum payment plus everything you were paying on the account you just paid off. To make this work, you'd have to close your accounts once they're paid off, or avoid using them at the very least.
By Interest Rates
Use the method Bankrate.com suggests, called the "payment push plan" if you want to pay off your debt while saving the most by avoiding interest when possible. Pay the minimum payments on each account, except the account that charges the highest interest. Pay the highest-interest account down as aggressively as possible. If you have two accounts with the same interest rate, attack the one with the highest balance first, as the interest will accrue faster on a larger balance. Again, attack one account at a time, moving from the highest interest rate down to the lowest. Apply the extra payments towards the new target until you have no debt.
To Maximize Credit Score
Plan your payments to increase and maximize your credit score if you're planning on taking out a major loan, such as a mortgage or new car loan, within the next few months. Higher credit scores generally mean lower interest rates, which can equal a huge savings on higher balance loans, such as mortgages. Part of your credit score is calculated on the amount of credit you have open to you, versus how much you're using. Ideally, your credit card balances shouldn't exceed more than 30 to 50 percent of the available credit. To raise your score, pay down the card with the highest percentage of credit being utilized until it's less than 50 percent, then move on to another until the balance on each account is less than 50 percent of the available credit. At that point, pay off the smallest balances or highest interest accounts, depending on the method you're most likely to stick with.
Restructure the Debt
Restructure your debt, if possible. Pay off your debt using savings or borrowing against other accounts if the penalties involved will cost you less than paying all the interest you're facing on your debts. Possible accounts to use include a 401k, IRA, stocks, bonds or life insurance. Alternatively, call your creditors and ask to negotiate a lower interest rate. Pay attention to low- or no-interest offers from creditors if you transfer balances. For example, transfer all your high-interest balances to a card offering a low introductory rate and pay it down aggressively.
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