Pay Down Debt

When you're up against multiple credit cards, loans, and so on, figuring out how to pay things down effectively can be overwhelming. There are several ideas out there, but the one we like best is paying down debt with the highest interest rates first. This doesn't have to mean you pay the minimum on the other accounts. Instead, figure out your total monthly minimum payment, then come up with what you can afford each month in addition to your minimum payment. With the additional funds, you should come up with a ratio among all your debts, but give a higher ratio to your higher interest rates. To best explain, lets use the example below:

Credit Card Debt Example

$3500 limit - $3000 balance @ 18% - Minimum Payment = $90 (3% + interest)

$3500 limit - $2800 balance @ 22% - Minimum Payment = $84 (3% + interest)

$4000 limit - $3500 balance @ 14% - Minimum Payment = $105 (3% + interest)

STORE Department CARD:
$1000 limit - $800 balance @ 26% - Minimum Payment = $24 (3% + interest)

We are using a 3% minimum (typically this could be from 2-4%) + interest as an example of minimum payments

  • Your total minimum payment due each month is: $303
  • You can afford to contribute an additional $197 ($500 each month in total)

Since our highest rate is 26%, lets contribute 45% of the $197= $88.65+$24 (minimum)=$112.65
Next highest rate is 22%, lets contribute 30% of the $197= $59.10+$84 (minimum)=$143.10
Next highest rate is 18%, lets contribute 15% of the $197= $29.55+$90 (minimum)=$119.55
Lowest rate is 14%, lets contribute 10% of the $197= $19.70+$105 (minimum)=$124.70

*Note: the percentages of additional funds towards each account could be whatever you want, but typically contributing a higher percentage of additional funds to higher interest rate accounts is best.

Your new payment each month equals what you can afford ($500). Now lets see how this will help get your balances paid off:

Highest Rate Credit Card - $800 balance @ 26% paying $112.65 per month: Paid off in 8 months

MonthFixed MO. Payment
Interest Paid
Principle Paid
Remaining Balance
 1 $112.65 $17.33 $95.32 $704.68
 2 $112.65 $15.27 $97.38 $607.30
 3 $112.65 $13.16 $99.49 $507.81
 4 $112.65 $11.00 $101.65 $406.16
 5 $112.65 $8.80 $103.85 $302.31
 6 $112.65 $6.55 $106.10 $196.21
 7 $112.65 $4.25 $108.40 $87.82
 8 $89.72 $1.90 $87.82 $0.00
*If you were to pay only the minimum ($24), it would have taken you 116 months (over 9 1/2 years) to pay off.

After your smallest balance is paid off, you should roll the amount of money you were paying on that balance over to your new highest interest rate account. In the example above, this would add $112.65 to the 22% Mastercard payment, currently $143.10. Since this would be 8 months later (in the example above), the next highest interest account should look like this:

New Highest rate Card @ 22%: New payment of $255.75. Since it would be 8 months of paying $143.10, your new balance would be down to about $2000. If at that point you went from 143.10 to 255.75 (adding your newly paid off credit card payment), you would have this card paid off in 9 months from then, (17 months in total). If you only paid the minimum on this card, it would take 199 months to pay off - that's 16.5 years and nearly $3900 in interest alone...

Once this card is paid off, you can roll that payment over to the next highest interest rate account or split it between the last two (using the example above). 

The key thing is: make a plan & budget on paying something in addition to your minimum. Stick with that budget until you are out of debt. By just using this simple example above, instead of paying for years (by just paying the minimum), you can have accounts paid off in months. More importantly, you'll be saving thousands of dollars in interest.

(Back) Set a Goal or back to Money Manager