Spending down debt: The best way to pay depends on your goals
This is part of our series on strategies you can adopt to free yourself from burdensome debt.
There is no doubt that the hardest part about getting out of debt is finding the extra cash to do it with. Most of our posts here on WalletPop deal with different shades of that perplexing question -- how to generate extra income, spend less money, find the cheapest credit cards -- all towards the goal of reducing your punishing levels of debt.
But there is another, not quite so hard question about getting out of debt that we've only scratched the surface of so far on WalletPop. That is, once you've unlocked that extra cash and are in a position to start actually getting out of debt, what is the best way to pay it off?
Simple answer: That depends on your goals. In this series we list common reasons people want to reduce their debt load and the best strategy for that goal.
The two main techniques for spending down debt, our blogger Lita Epstein has come up with are the 'Snowball Effect' and the 'Round Robin.' The snowball effect is best for people who are getting eaten alive by high interest charges on their credit card balances. The plan there is to simply pay off your high interest credit cards first.
Things get more interesting with the round robin plan. That technique is best for people who are anticipating needing a large loan in the near future and want to improve their credit score in a hurry. The round robin technique advises you to pay off a chunk of each credit card in consecutive months until the balance on multiple cards (assuming you have them) is a small percentage of your total credit limit. That's a great way to raise your credit score, Epstein advises.
From those two basic methods, we've come up with some other situations that call for different debt-elimination techniques.
- You want to repair relations with the friends and family members you've borrowed money from.
- You are afraid of losing your home.
- You are close to retirement and don't want to leave your job with a heavy debt burden.
- You just got a big windfall and have a one-time chance to get out of debt.
Any of these fit your situation? Read on through the posts in this package. Do you have any additional questions for our credit and debt expert? Write to Lita Epstein and she'll do her best to help you come up with a solution.
Reader Comments (Page 1 of 2)
3-13-2008 @ 9:02AM
leigh said...
is it worth it to use the equity in an automobile to pay down credit card and out standing loans, particularly if the monthly payment will be decreased to the point that it is actually lower than the current car payment? Even though the interest is 1% higher?
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3-13-2008 @ 9:20AM
laureen morison said...
I believe yes because the credit card companies can always raise their interest rate sky high if you are late with a payment I have seen 28% and higher, they can also charge you late fees. But if you do this, use every dime for the bills mister
3-13-2008 @ 9:17AM
laureen morison said...
what if you are on diability social security, can not afford to pay ANY credit card debt you are lucky if you can get food in the food pantry line. Yes they offer settlement offers, write off your debt as a charge off but you still owe the money they wrote off. Seems to me that is double dipping they get a tax credit for bad paper and I still owe them the money.
So what now, sound like one even suzie orman couldn't answer, can you?
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3-13-2008 @ 1:07PM
Debra said...
Replying to Laureen Morrison about being on disability, I am in the same boat. On top of that I went through a divorce in 2002 and was left wil a boat load of credit card debt, had to buy out my ex for half of value of the house in order to keep my home for myself and my three boys.
After trying to deal with the creditors myself, I went through two different reputable credit counseling firms, tore up all my credit cards and was paying through them. However, with the amt. of debt and what I was able to afford to put in the "fund" each month, it wasn't workig. Even wth them getting the late charges stopped and the interest rate dropped, the balances were either not going down or were bein reduced by minute amounts.
Finally I researched and found a debt company that promised to "negotiate" with each creditor to reduce down the balances. It basically worked the same way as I paid a monthly amount into an account. The debt company got their fee up front from the first three payments. I was told it would take about 36 months and once all were paid, they would run my credit report through three cycles to verify all the accounts were reported "paid as agreed". Long story short, I'm now getting call from creditors (law firms mainly) trying to ge me to pay the difference between the negotiated amt. paid and the original balance. Once my account manager left the firm which I wasn't told about (I learned it through a creditor who tried to call her), the communication between the debt payment company to me is spotty and insufficient. I still have debt and am negotiating a few of the debts myself, including the largest one. I've complained and am supposed to be getting a "call" from a manager, but it is all frustrating mess. I stopped the monthly drafts going to that account, but am still being charged monthly
"maintenance" fee. They are telling the remaining few creditors they don't have enough funds available to negotiate with. I can't afford to get a lawyer and still have ongoin medical problems and the bills that come with them.
So, to Laureen, I feel for your plight with the set disabiliy income and trying to simply keep a roof over your head, food in the pantry and the utilities paid with all of them going up, up, up!!! Help!!!!
3-16-2008 @ 1:51AM
Mary said...
Not everyone who owes has used their credit irresponsibly. Sometimes circumstances change -- illness, disability, support payments not paid, loss of job, and more.
You can go to Senators and other elected officials for help, including lowering student loan payments. Also try CCCS (reputable group), but you need something to pay with each month.
You can also contact creditors on your own. They would rather have something than nothing! If you just can't, then --
NOTE THIS: after 7 years, IF you pay NOTHING, it should be off your credit record. If not, you can request it be taken off -- seven years after you last paid. (Bankruptcy takes 10 years to come off the record -- but cards love to extend credit if you bankrupt, because you can't do it again for 10 years, so you have to pay.)
They will still contact you! -- but pay nothing, and if they harrass you complain to the state atty. general. Also, give them no info about your current situation.
Not a pleasant result, but if you really have to . . . especially if you have children to feed and keep a roof over their heads. And eventually, with just a bit, you can rebuild credit again -- maybe start with a secured card, store card, gas card. Be sure to pay on time, always, even if only the minimum or by phone.
Do double-check this info, in case it's out of date.
And for everyone who ends up on public support -- disability, welfare, whatever -- keep your pride. And remember, part of why you and your parents have paid taxes is so you will have this support if you need it.
3-13-2008 @ 9:30AM
Candy said...
I recently sold my home with the intention of buying another. Due to the change in the market i've opted to rent a place instead. With the extra cash i'm wondering if i should pay down debt or just hold on to the cash.
Reply
3-13-2008 @ 10:17AM
Susan said...
Save $1,000 of it for an emergency fund. Pay off as much debt as you can with the remainder. Go to daveramsey.com and clikc on Financial Peace University to get out of debt and stay out of debt. It changed my life!
3-15-2008 @ 10:01PM
Mark said...
Pay off your debt: if you figure that credit cards are running between 14 and 21% and the cost to get a mortgage is between 5.75 and 7%, lose the high interest on your existing debt and bank on the lower mortgage when the housing market regains its balance (which is unlikely to happen for a minimum of 6-9 months). Additionally, with mortgage lending being so tight right now, the lower income to debt ratio will be a huge factor when you DO go back into the real estate market. Hope this helps!
3-13-2008 @ 10:17AM
Susan said...
Your only option is to spend less and make more to get out of debt. Go to daveramsey.com to find a Financial Peace University class near you. It is the only long term plan that works.
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3-13-2008 @ 10:53AM
cself85581 said...
Another great source is www.iabundance.com
3-13-2008 @ 11:11AM
Michael Burke said...
You are correct with the Dave Ramsey way, which all he teaches is to spend less than you make. Wow what a concept.Something that I,m pretty sure he would not agree with that I did to get out of credit card debt is this. If you can get them and have the will power to use them with a purpose, take the offer of a zero percent card, transfer your balance on the card with the highest finance charge.With a vengance attack that balance, by the time the introductory rate is over you would have payed it down considerably.Then get another and cancell the old one. Of course you should never purchase anything with the cards and never use a credit card again.
3-13-2008 @ 10:40AM
Jean said...
You can always get an extra part time job and use that money to pay your bills. If you add just a few extra dollars on you mortgage every month, that money goes directly to the principle, which means you will pay less interest in the long run and pay your mortgage off earlier. Most banks won't tell you this because they want all of your money. Have your payments taken out automatically so you won't be paying late fees.
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3-13-2008 @ 10:49AM
Shelley said...
What do you do if your debt is about $100,000 on your credit cards and you can't find a way to consolidate to pay a lower interest over time? I'm very leery of going to debt consolidation companies because I see only complaints at the Better Business Bureau. I tried consolidating half the debt at my credit union, but they would only do $12,000.00 at a high interest, if they would do that much money at all. Then I saw that my credit union is in bed with Country Wide, the notorious mortgage people and in bed with the company they referred me to for consolidation.
What options, if any, do I have?
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3-13-2008 @ 11:09AM
Susan said...
Not to be a broken record, but seriously, go to daveramsey.com and click on Financial Peace University. Dave talks about dumping debt in lesson 4. And he talks about what to do about creditors in lesson 5. Do not do debt consolidation, it is a rip off. This really works. If you follow his plan you will get out from under this!
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3-13-2008 @ 11:19AM
Susan said...
Do not pay extra on a mortgage when you are in debt. Yes, paying your mortgage like it is a 15 year is a great idea, but not until you get out of debt and save 3 - 6 months for an emergency.
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3-13-2008 @ 11:13AM
Keith said...
Here is another method of buying down your debt. Pay the minimum payments of all the credit cards except one, the lowest balance. Once it is paid off, continue the process until the largest is the last to pay off. The idea is to remove the number of debts, not just the balances. By reducing the number of debts, you are able to pay more monthly. That way you actually pay off your debt quicker.
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4-03-2008 @ 11:20AM
Maurice said...
very true works well!!!
3-13-2008 @ 11:19AM
Susan said...
It is true that spending less than you make is a very important thing that Dave talks about, but that is not even close to all of the information you get in the 13 week course. It is hugely beneficial. I teach the class now because it made such a huge impact on my life. I have nothing to gain from telling you all this. I am a volunteer who believes in the life change this information gives people. When you hear the lessons it is a big aha! moment. Seems obvious after you experience it, but you don't already know it. It is not easy, it is work, but it CAN be done.
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3-13-2008 @ 11:52AM
ktsfamily said...
One additional way to reduce your debt and your payments is to use a credit counseling organization. Consumer Credit Counseling Service (CCCS) has been around for a long time and charge you nothing for their services. They are the original credit counseling organization. They have the ability to get the credit card interest rates reduced or stopped entirely.
Reply
3-13-2008 @ 5:33PM
SJSM said...
CCC does charge a fee...which is minimal, around $30.00 per month. However, they don't offer to negotiate your debt balances. They are what they are.