Financial Planning

It is not uncommon for someone to come out of college with a ton of credit card debt. While this mountain may seem impossible to conquer, it is not quite as difficult to get out from under this debt as you would think. There are two basic schools of thought on how to pay off your credit cards quicker, and both of them are effective. However, we do prefer the high interest to low interest, but it is ultimately your decision.

Small Balance to High Balance

This is a method that some people recommend because it will tend to show faster results in terms of closing out cards. This does not necessarily mean that your debts will be paid off quicker; it is just that it shows progress quicker and will keep your outlook going in the right direction.

The first step here is to get all of your credit cards together and write down all of their balances. Rank them from lowest to highest and then look at the total amount of money that you have been using to pay them all off. Now look at the minimum payment and make sure that it is reducing the principal. This may not always be the case when there is a high balanced card.

Once all of this information has been gathered, set a reasonable time line to have the first card paid off (this should be based on the money that you have been paying and the minimum payment being made on the other cards). For instance, if you have been paying $1,000/month to credit cards and the minimum adjusted payment on all cards comes to $750, you have $250 dedicated to the card with the lowest balance per month.

Once that card is paid off, the money rolls into the next card with the lowest balance. Regardless of how many cards you have left, the same $1,000 will be paying them off until you are debt free. Again, the advantage to this method is that you will see progress in the way of zero balances and that may be what keeps you motivated to continue.

High Interest Rate to Low Interest Rate

This is actually the preferred method, but works the same way as the one above with one variance. The difference is that you are ranking the cards by their interest rates and looking to knock out the one with the highest rate first. Again, as the first card is paid off, the money that was used to pay it will be rolled into the next card in line.

The important thing is that instead of making little or no progress on any of the cards, you make great strides on the one with the highest balance and your money is being used more effectively. It may take a little longer to pay of that first card, but when faced with an interest rate in the mid to high .20 range, the savings can be quite significant.