Okay, you’ve made some bad moves ^[2]. You’ve found yourself using one (or more?) of the 10 excuses for going into debt ^[3] and now you’ve seen the error of your ways and are committed to getting that debt monkey off your back. You’re looking for a strategy to pay off that debt as soon as possible but you’re not sure which way to turn now.

Assuming you’re going to use the debt snowball method ^[4], which of the 3 different debt payoff strategies should you use? What’s the wise move?

Pay off the smallest balances first.

With this strategy, you’re able to make a quick change to your situation, one that’s easy to see. You get to experience rapid successes by paying off company “A” then moving on to company “B.”. This is a good method for people who have a large number of debts ^[5], because once you pay off company “A” you’ll have a visible success and never have to think of that stinkin’ debt again.

^[6]Paying off 100 percent of any debt is extremely satisfying and will make you feel a sense of progress toward becoming debt-free. In addition, if you’re overwhelmed by the sheer quantity of payments you’re having to make every month, and all the accounts you have to maintain, you might like to go with this plan. I know from personal experience, that seeing the overall number of debts you owe shrink from 12 to 11 to 10 to 9, in a short period of time was very motivating. If you’re motivated ^[7] by quick progress, this could be your most useful strategy.

Pay off the highest interest rate first.

This scenario makes the most sense from a pure financial (dollars-and-cents) approach. If you pay off those debts ^[8] that cost you the most in interest, you get to keep more of your money over the long run. A credit card ^[9] debt of $10,000 can potentially cost you $200 in interest every month.

Even if you have a credit card ^[9] with a small balance and could pay it off immediately, if the interest rate is lower than your other debts, this strategy dictates that you work on the higher interest rate card first. By directing your excess cash to your highest interest rate debt, you’ll see your principal amount shrink faster and ultimately, you’ll save more money in interest.

Pay off the debt that will help your credit score the most.

If you’re planning to apply for a loan in the near future, how you pay down your debts could save you more than either the smallest payment or the highest interest rate approach. Credit scores ^[10] look at a number of factors and one of them is, what percentage of a credit card’s limit is owed? If you owe more than 50 percent of the limit, you potentially lose credit score ^[11] points. Paying down your balances so they’re all below 50 percent of the maximum will help your credit score ^[11] and might save you some serious money on longer term loans.

In the end, the debt payoff strategy you choose is personal and you have to pick the strategy that works best for you. Despite the prognostications by “financial experts” or even bloggers, the strategy you choose isn’t nearly as important as actually choosing one … and sticking with it. Similar to starting an exercise regime or a deciding to alter the types of foods you eat. The plan you choose has to satisfy you … not someone else or their theories on how you should live your life. You know your individual circumstances and you know best what will work for you. But make no mistake, paying off your debt is the right thing to do to avoid your own personal economic crisis ^[12], and as always, if you use the proper motivational strategy, along with a plan to make extra money ^[13], you’re well on your way to debt freedom!

photo ^[14] credit: weegeebored ^[6]

About the author

Ron has written 1080 articles on The Wisdom Journal.

The founder and editor of The Wisdom Journal ^[15] in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a partner in a national building materials company.

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