Interest can make your debt balance grow faster than you can pay it down. If you have a credit card balance or other debts earning a high interest rate, paying off the balance is one of the best investments you can make. Wiping $1,000 off a credit card with 20 percent interest is equivalent to investing $1,000 at 20 percent interest — and very few safe investments pay that well.
No More Debt
When you carry a balance on a credit card, the card company charges interest on every purchase you make from the instant you make it. The best way to avoid this is to stop using the card and switch to cash or a debit card instead. With a large balance, it's tempting to think that one or two more small purchases won't increase your debt enough to matter, but even interest on small purchases add up over time.
Wiping out a debt completely feels great. Sometimes too good. Many people prefer wiping out small debts to trimming down big debts, even if the big balance earns a much higher rate. Even if you hate writing four or five monthly checks to different creditors, paying extra toward your highest-interest debts will save you more money than paying the same amount to wipe out two low-interest accounts. Identify the debt with the highest interest and make it enemy number one.
Transferring debt from high-interest cards to low-interest ones can be a useful debt-management tool. If you get a promotional offer for a new card — one year at zero percent interest for balance transfers — everything you put on the card stops accumulating interest for 12 months, so your payments go toward principal on the debt. Unless you make a serious effort to pay down the debt, however, merely shifting it around won't help much.
To make an effective assault on your debt balance, you need to know how much money you have to work with. Sit down and total up your monthly living expenses, your fun spending and your debt payments. If you're not sure of the amounts, keep all your receipts for a couple of months, then total them up. Figure out the most you can devote to paying extra on your debts and where you can trim your budget to find money for more payments.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.