If you’re managing multiple debts, you may be struggling to start your repayment journey. When developing a debt repayment strategy, it is common to start with your debt with the lowest balance or the debt with the highest interest. And while tackling the debts with the highest interest rates can save you more money, starting with the lowest balance can greatly increase motivation.
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Benefits of Paying Your Lowest Balance Debt First
The repayment strategy that starts with paying off the lowest balance is also known as the debt snowball method. Taking a smaller debt off your “to be paid” list will give you a quick profit. And this quick win can boost motivation as you continue to pay off your higher balance debts.
After you pay off the first debt, apply that payment to the second debt. This puts more money toward each successive debt, creating the effect of a snowball rolling down a hill and gaining momentum.
Benefits of Paying Your Highest Interest Debt First
Starting to pay off your highest interest debt is also known as the debt avalanche method. This strategy typically results in greater interest savings by eliminating debt with a higher interest rate first. However, with this method, you may not get the same quick profit you would by withdrawing the lowest balance first.
As with the debt snowball strategy, when you complete your first debt payment, you put extra money into your second-highest interest debt. You will then continue until all debts are paid, hopefully saving you a lot of money in interest along the way.
How to choose a debt repayment strategy?
Depending on how much debt you have, repayment can take months or years. That means choosing the best strategy is critical to keeping you on track in the long run. Here are some tips to help you decide which debt to pay off first.
Organize your debt data
Start by recording the details of your loans and credit cards. List your terms, current balance due, and interest rate. Putting all these debt details together can help you figure out where to start.
Calculate potential savings
Then use a debt payment calculator to compare how much you can save by paying off the lowest balance at the highest interest first. You may realize that there are far-reaching financial consequences to paying off the highest interest debt first. And if you’re driven by cost savings, that might make your decision easy.
For example, let’s say you have two debts: a credit card with a balance of $5,000 at 16% APR and a car loan with a balance of $3,500 at 4.5% APR. We also assume that you currently pay $100 per month for each and can pay another $50 for debt service. By starting with the debt with the highest interest, you could end up saving about $300 more than if you started with the lowest balance.
Choose which debt you want to pay off first
You know yourself and your financial situation best. That means you’re the only one who can tell whether it’s best to start with the lowest balance or the highest interest rate. If you’re motivated by saving money, it probably makes sense to tackle the highest-interest debt with the avalanche method. But if you’re motivated by small wins, it’s probably best to start with the lowest balance and use the snowball strategy.
it comes down to
Whether you choose the debt snowball, debt avalanche, or any other debt repayment method, the important thing is to be consistent. By paying regularly and sticking to your strategy, you’ll pay off the debt in less time and ultimately pay less interest.
Brooke is a freelancer focusing on the financial wellness and technology sectors. She is passionate about all things wellness and spends her days cooking healthy recipes, running and snuggling up with a good book and her fur babies.
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