Two Ways To Tame Your Debts.
With the holiday season over and the New Year here many people will be getting those dreaded credit card bills that have the holiday seasons purchases on them as well as other purchases that were made prior to.
Sure we can all say the easiest solution to getting rid of our debt is to not accumulate any in the first place, but lets face it life happens! Unexpected things can come out of nowhere, good or bad it just happens and no one can predict how much it might cost you.
Having said that, there are a couple of ways you can get control of your debts and pay them off.
Lets use an example. You owe a total of $25,000 to five different Creditors. Your first step is to figure out what each debts interest rate is and your minimum monthly payment.
| Debt | Balance | Interest Rate | Minimum Monthly |
| Visa | $5,000 | 22% | $100 |
| Line of Credit | $3,000 | 5% | $60 |
| Student Loan | $12,000 | 8% | $240 |
| Master Card | $1,500 | 11% | $30 |
| Store Credit Card | $3,500 | 19% | $70 |
According to the chart above you are paying $500 in minimum payments each month.
Next you need to figure out how much extra cash you have that you can contribute to paying off your debt each month above the minimum monthly payments. Lets say you can afford to contribute an extra $300 each month to paying off your debt.
There are two methods we are going to look at debt snowball and debt avalanche.
Debt Snowball: list all of your debts from smallest to largest balances. You will start by paying off the smallest balance first which in this case you would pay off the Master Card and once that is paid off you would move onto the Line of Credit and so on. Just remember that once you pay one off you should take that extra $300 as well as the minimum payment from the Master Card and apply it to the next largest debt each month.
You will be eliminating the number of creditors faster which will give you the motivation you need to pay off all your debts.
Debt Avalanche: This approach is slightly different in that instead of paying off your lowest balances first you will pay off the one with the highest interest rates.
When you do the math this method is most effective way to repay debt because you will end up paying less interest over the course of your repayment schedule.
While both methods will work it is really up to you and how you would like to go about getting your debts under control in 2012.
If you have a home and you have equity you can also consider a re-finance to eliminate all the monthly payments and simply increase your current mortgage payment. Call us today if you would like more information.
