From credit cards to home mortgages, most people owe some form of debt. Your credit score can affect getting the car or home you want and even whether you are eligible for certain types of employment. Paying off outstanding debt is the best way to raise this score. Here are a few strategies that will aid in paying off those debts.
Pay off Lowest Amount First
One method of reducing debt is to pay off the smallest balances first. This method is results oriented -- as you pay off a small debt, you can eliminate that creditor from your monthly list. Eliminating any debt from your budget is liberating and grants a sense of empowerment if you are struggling with debt. Financial adviser and radio talk show host Dave Ramsey calls this approach the "debt snowball" (see Reference 1). Paying off the smallest debts first will enable you to see actual results and keep you motivated toward paying off the next largest debt.
Paying off Highest Interest Rate First
Another effective debt strategy is paying off debts with highest interest rates first to save money in the long run. The more money you can throw at a large sum, the less interest you will accrue. Some interest rates can be as high as 30 percent -- if you are paying only the minimum payment every month, the majority of your payment is going toward the interest. Place as much as you can into your highest interest rate account and pay the minimums on your other accounts and you will see a drastic reduction in your principle.
Consolidating Debts
Debt consolidation is a great tool to aid in debt relief. This method is most beneficial if you have several accounts with very high interest rates. Take these accounts and combine them into a single account with a lower interest rate. While your balance may be high on this new account, you have a lower interest rate, which saves you money. Another benefit is that you no longer have the headache of managing multiple accounts. Continue to focus your extra funds into this account and you will become debt-free and improve your credit score.
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