If you have a credit card that has accumulated debt on it, you are in good company. According to an Experian report published in the third quarter of 2020, Americans carried, on average, $5,315 in credit card debt. While that number is alarming, it only applies to credit card debt and not additional debts, such as student loans, mortgages, and vehicle loans.
With so much debt being carried month-to-month, it can be difficult to know which debt to prioritize and pay off first. Some say it is best to pay off the debt with the highest interest first, while others suggest paying off the debt with the smallest balance first. When you are deciding which debt to pay off first so you can get rid of debt and even potentially avoid a lawsuit, below are some tips that may help.
Paying Off Debt with the Highest Interest First
It is understandable why people want to pay off debts with the highest interest rate first. That high interest rate is only making it more difficult to pay off the debt, and it continues to accrue over time. Credit cards that have annual percentage rates (APRs) that are higher than average are particularly difficult to pay off. Anyone with a student loan or a mortgage knows how difficult it is to make monthly payments that only pay off the interest and do nothing for the principal amount of the loan.
To eliminate high-interest debt as quickly as possible, it makes sense to pay down your debt with the highest interest rate first. This is often referred to as the avalanche method. You should still continue to make at least the minimum payments on your other credit cards so your account is not closed or worse, so the debt collector does not file a lawsuit against you. However, anything extra you have every month should go towards your credit card with the highest interest rate.
Although focusing on the debt with the highest interest rate is good for many people, it does not work for everyone. If you have many debts you have to pay monthly, or the debt with the highest interest is huge and overwhelming, you may want to explore other options.
Paying Off the Smallest Debt First
You do not always have to focus on the interest rate you are paying when deciding which debt to pay off first. Many people choose to pay the smallest debt first and then work up to paying off the biggest debt. This type of debt repayment plan is known as the snowball method because it starts small and grows over time.
The idea behind the snowball method is that it allows you to pay off the smallest debt quickly, which can provide incentive to continue working towards your goal. Additionally, as you eliminate small debts, it frees up cash flow to put towards your bigger debts. Paying off your smallest debt first and working your way towards your biggest one may cause you to incur more interest, but the psychological benefits are very rewarding when you see how much in debt you are paying off.
When using the snowball method, list all of the debts you are currently paying. Include their balances, and list the smallest debt at the top, then continue listing the rest of your debts, ending your list with the largest debt. Keep making the monthly payments on all of your debt while placing as much extra cash as possible towards your smallest debt. After you have paid the smallest debt, you can then start paying down the next debt on your list until you no longer have any debts hanging over your head.
Consolidate Your Debt
While it is not generally advised that you work with a debt consolidation company that will only charge you a fee, you can actually consolidate debt on your own. You can take out a loan that will allow you to pay off all of your debts and pay off just the one loan instead, or you can use a credit card that will allow you to transfer your balance of all other cards onto it. Homeowners can even use a home equity loan or home equity line of credit to consolidate their debt. When using this approach, you should always try to use an option that will provide a low interest rate, which is why home equity loans and lines of credit, as well as personal loans, are often the best options for debt consolidation.
Using a Balanced Approach
For some, tackling the largest debt first may seem overwhelming. On the other hand, making the largest payments on the smallest debts may not make sense, particularly if other debts have fallen into collections or you fear you are about to be sued over the unpaid debt. In these situations, you may have to take an approach that is more balanced and totally tailored for your circumstance.
For example, if you have debts in which you can deduct the interest from your tax return, such as student loans or a home equity loan, you may not feel as pressed to pay these loans as you are with your credit card debt. Or, you may not want to focus on small debts when you have a large debt that has already been sold to a debt collector. In these cases, you may choose a debt solution that is unique to you and that incorporates one or more debt-paying options.
Call Our Debt Defense Lawyers in Florida Today
The above debt-paying solutions are very effective for some but for others, they may not be enough. When that is the case and you fear a debt collector will take legal action, our debt defense lawyers in Fort Lauderdale are here to help. At Loan Lawyers, we know the defenses available that will give you the best chance of a favorable outcome. Call us today at 954-807-1361 or fill out our online form to schedule a free consultation.
Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation and find out more about our money back guarantee on credit card debt buyer lawsuits, and how we may be able to help you.