Paying down debt: comparing two strategies
Paying down debt: comparing two strategies
Paying down debt: comparing two strategies
You’ve decided to pay down your debt – now what? There are two popular strategies for paying down debt: the Highest Cost Debt First Method, and the Snowball Method. Let’s review to figure out which is best for you.
Note: for each method, we assume you are paying at least the minimum payment due on all debts, on time every month.
Highest Cost Debt First Method – This method will save you money on interest, but your progress in paying down your debts may feel slower.
- List your debts – ordered from the highest interest rate down to the lowest rate.
- Apply any extra payments toward the highest interest rate debt on the list.
- After the first debt on your list is paid off, apply the amount you were paying toward that first debt (that minimum payment + the extra) as extra payment funds towards the next debt on the list.
- Continue this process as necessary
Snowball Method – This method will allow you to eliminate the number of debts you have faster.
- List your debts – ordered from the lowest balance up the largest balance.
- Apply any extra payments toward the lowest balance debt on the list first.
- After the first debt on your list is paid off, apply the amount you were paying toward that first debt (that minimum payment + the extra) as extra payment funds towards the next debt on the list.
- Continue this process as necessary
The Snowball Method may be for you if you need motivation to stick with your plan. On the other hand, if you have no problem sticking with your strategy, and want to pay the smallest amount of interest possible, then the Highest Cost Debt First Method may be a better fit. Either way, the best debt reduction plan is the one that you stick with!
Durham Tech Community, for more personal finance advice or tips, email me at chapmanl@durhamtech.edu
Larry is the Financial Coach at Durham Tech, providing individual coaching services and information to the students and employees of the Durham Tech community.