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Business // Thinking Smart
David S. Chang

Two Ways To Pay Down Your Debt

Financial problems are all around us. Many Americans today are in debt and are having difficulty paying it down. According to the latest statistics:

* U.S. households have more than $15,000 in credit card debt.

* 43 percent of Americans spend more than they earn.

* 14 percent of income is used to just pay interest on credit card debt.

* Overall, consumer debt has increased by more than 1,700 percent since 1971!

In addition, financial problems is the No. 1 stressor in marriages and is cited in 90 percent of divorce cases.

If you are one of these statistics, don’t despair. Following these steps can help you get out of debt sooner than you think. First, you must stop making excuses about your debt and start tackling it right away. Second, start a budget to control your expenses. Start with your income, and then begin subtracting your expenses, then set up your budget to control those expenses. The crucial thing here is to distinguish between your needs and wants, and then cut back on the unnecessary wants. In your budget devote more money to paying down your debt than just the minimum. The next step is to start paying down your debt! There are two popular ways to pay down debt: The Debt-Snowball Method and the High Interest Method.

The Debt-Snowball Method

This method focuses on paying down the smallest debt first regardless of the interest rate. You concentrate on paying down as much of the smallest debt first while making the minimum payments on the rest. When you finish paying off the first debt, you roll over that payment to the next debt payment in addition to the minimum payment you were already making. When you continue to do this, the payments you make toward your debt grows larger like a “snowball.”

High-Interest Method

This method focuses on paying off the highest interest debt first while making minimum payments on the rest. Once the highest interest rate debt has been paid off, you move on to the next debt payment with the highest interest rate. The advantage here is that in the long run you end up paying less, but you do not see the regular successes as with the debt-snowball method.

Conclusion

Which method is better? It depends on the person. If you can handle paying off debt without seeing regular successes initially, then choose the high-interest method since you will pay less money in the long run and pay it off quicker. But if seeing regular progress and success is important to you now, then the debtsnowball method is the best method to choose.

The important thing here is that you have an active plan to pay down that debt.

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