It can be difficult to make a dent in your debt if you only pay the minimum balance every month. If you have money left over in your budget to pay more than the minimum, there are two basic strategies on how to best apply it.
You can either pay your debts from smallest to largest or focus on repaying the ones with the highest interest rate first. One strategy isn’t better than the other – they each have pluses and minuses to consider.
What to do
- Pick a repayment method that works best for you
- List your debts in order based on the interest rate or the overall size of the debt
- Review the pros and cons of each strategy for paying down debt
- List your top five debts based on the strategy you choose
After you’ve made all your minimum payments, increase your payment on the smallest debt. After it’s paid off, add that extra amount to your minimum payment on the next smallest debt.
If you have many small debts, you might see progress quickly by reducing the number of debts you owe.
If the interest rate and fees are high on your larger debts and you pay the smaller ones first, you might pay more in total over the length of the debt.
After you’ve made all your minimum payments, increase your payment on the debt that has the highest interest rate. After it’s paid off, add that extra amount to your minimum payment on the next highest-rate debt.
By paying off the debts that charge you the highest interest and fees first, you save money overall.
You might not feel like you’re making progress very quickly, especially if the first debt is large.
Download this fillable PDF to start reducing your debt.
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This material is provided for educational and information purposes only. It is not a replacement for the guidance or advice of an accountant, certified advisor, or otherwise qualified professional.