Reduce Debt by Paying Off High Interest Loans First
Last Updated: November 17, 2011
If you are over your head in credit card debt, you are not alone. According to a recent survey by creditcard.com, the average American household carries more than $15,000 in credit card debt. With all of that debt, which credit card is the most important to pay on? Let's say you are starting to get back on your feet and you want to start to pay down your credit card debts - which one do you pay more on and which ones do you stick to paying the minimum payments for now?
Pay On High Interest Loans First
According to a study done by a consumer behaviorist at the Olin Business School at Washington University in St. Louis, people really like closing accounts. That is, they will close a small debt account that has a low interest rate at the expense of paying down a larger loan with a higher interest rate. Throughout a series of debt-management experiments, the researchers found that participants consistently paid off small debts first, even though the larger debts had higher interest rates. In fact, no participant in their study used their cash to pay off the loan with the highest interest rate.
Maybe, paying off the small debt offers greater relief eventhough it is not necessarily the best approach to minimizing your debt burden. If you have some extra money at the end of the month, put that extra money on the loan with the highest interest rate. By making a dent on the principle owed, it will lower the amount of interest you will pay on that money which will in turn save you money in the long run.
Transfer Balance to a Lower Interest Card
If you can, try to obtain a lower interest credit card and then transfer the balance of the high interest card to that one. Make sure to read the fine print when making this transfer. Sometimes the wording of these low interest cards sounds good at first until you really dig down to the nitty gritty and read the fine print of the contract.
Sometimes these low to zero interest credit cards are only available to those with good to excellent credit. If you have not been late on your payments and think your credit may be pretty good, give it a shot. Also, some offer introductory rates of 0% and then jack it up to 12% after the honeymoon period, make sure you stay away from those types of cards. Try to stick with a card that starts off with a low interest rate that does not increase.
Borrow Against a Life Insurance Policy
One way to get out from under this enormous amount of cardit card debt is to find some other sources of money from which you can borrow or withdrawl. A great source may be a life insurance policy with cash value you can borrow against. Yea, you are still borrowing money to pay off borrowed money, but the interest rate on the life insurance policy will be far lower than what you are paying the credit card company. Pay off the card with the highest interest rate and then you can make payments back to the life policy.
Negotiate a Better Interest Rate with Your Creditor
If you can not get a lower rate card and you do not have any other means to get some additional funds, try negotiating a better interest rate with the credit card company. Let them know about your situation and tell them that if they do not work out some new terms with you, you may have no choice but to file bankruptcy. More often than not, a creditor would rather work out a deal with their customer than to completely lose the entire account.
Strategies to Help Reduce Debt
Encouraging people to choose the optimal debt management decisions can be difficult. Without proper motivation, some of the best laid plans can go by the wayside. Here are a few tips to help you keep your focus:
- Combine several small debt accounts into far fewer larger accounts to prioritize interest rates.
- Put extra money toward the loans with the highest interest rate.
- Pay off the debt that will help your credit score the most.
- Pay more than the minimum monthly payment each month.
- Create and stick to a budget.
Using all of these tools, will help you get out of credit card debt. The bottom line - you want to make the most of the money you are going to be applying to your debts and paying off the highest interest rate loans is the best way to utilize your funds. Doing this will also help you pay LESS in interest in the long run. Stick to your plan and there will be a light at the end of your debt-free tunnel.
| ||||||
Do you have a question you feel we haven't answered?
Get a FREE initial credit or debt consultation or buy our book "Good Credit is Sexy".
Order Paperback Now and Receive a FREE Sample Letter CD - Only $19.95 |
