A Simple Plan for Paying Off Your Debts

Posted on Thursday, August 6th, 2009 at 8:03 pm in Financial Planning

In the old days, so your grandparents may have told you, everyone lived within their means, nobody ran up credit card debt, and the world was a happier place. Maybe not 100% true, but the fact is that more and more of us seem to be drowning in credit card bills, mortgage foreclosures and loan repayment demands nowadays. If you’re only paying the minimums on your cards and struggling to fulfill your other financial commitments, you’re probably wondering how on earth you’re going to pay off all your debt.

You’ll be pleased to hear that there’s a very straightforward way to clear your debts quickly and systematically. It involves paying them off in order of interest rate, with the most expensive ones first. Start by listing all your debts, noting the rate you’re paying on each. Now look at your budget to see how much you can spare for debt repayment each month. Cut down on some of your non-essential expenses such as eating out, clothing or subscriptions to free up as much cash as you can.

Let’s say you have three credit cards. Take the one that carries the highest interest rate and pay as much as you can into it, while still paying the minimum charges for the other two. Keep doing that every month until you’ve paid off your highest-interest card. Then take the second most expensive credit card and pay the minimum plus whatever you were paying on the first card until that one is paid off too.

Carry on paying the minimum on your third card. When you only have the third card left to clear, you can direct all the money to it. When the last card is paid off, you’ll be free of credit card debt, provided you haven’t started running up charges on the others again.

The aim is to keep the total you pay towards your credit cards constant every month. As you pay each one off, you’ll be able to restore the balance to zero on the next card more quickly because you have fewer debts to service.

So why should you prioritize your higher-interest debts? Quite simply because when you borrow at a high rate of interest, the amount you owe grows faster than it would on a less expensive loan. The longer your loan period, the more interest you pay on any debt. If you can reduce the loan period – or in this case, the time it takes to clear your credit card balance – by paying more each month, you dramatically cut the amount of interest you need to pay. Therefore, you save money by getting rid of the more expensive debt more quickly than your other debts that have a lower annualized percentage rate.

Millions of people around the world have managed to escape from their debt nightmares by using this easy repayment method. It does require a bit of careful financial planning, some personal sacrifices and a lot of discipline on your part. Try it – you’ll be pleasantly surprised at how quickly you too can be debt-free.