Debt is something many adults struggle with. Sometimes you have to take on loans or use credit cards to get things done. Maybe you took out a loan to go to college. Perhaps you got one of those easy installment loans to complete a project. Whatever the case, you are now looking at a mountain of debt. Here are some tips to help you decide how to pay your debts down.


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What Is Your Motivation?

You have to decide what your motivation is for credit repair. Are you trying to buy a home? Are you trying to raise your credit score? Once you have your motivation for reducing your debt clear in your mind, then you can figure out which method of debt reduction is right for you.

The Snowball Method

One popular method of paying down debt is the snowball method suggested by Dave Ramsey. With this method, you pay down the debt with the lowest amount first and then work your way up to the largest amount next. With this method, you ignore the interest and just focus on the amount. Once you finish paying off one debt, you use that money to go towards paying off the next debt. You still pay whatever the minimum monthly payment is on your other debts so you don’t have late charges. So let’s say your debts look like this:

  • -Installment loan: $500 - monthly payment $50
  • -Car loan: $5,000 - monthly payment $100
  • -Student loan: $20,000 - monthly payment $150

Using the snowball method, you would pay off the installment loan first, then you would use the money you used to use to pay off the installment loan to pay off the car loan. Once you finish paying off the car loan, you do the same thing to pay off the student loan. The logic behind this method is that you give yourself an immediate psychological reward when you pay off the smaller debt.

Pay According To Which Loan Has The Highest Interest Rate

Some people like to pay their balance off depending on which one has the highest interest rates. So with this method, you pay the minimum on your accounts with lower interest rates. You focus on paying off the account with the higher interest rate first. So let’s say you have these debts:

  • -Student loan: $20,000 - monthly payment $150, interest rate of 9%
  • -Car loan: $5000-monthly payment $100, interest rate of 5%
  • -Installment loan-$500 monthly payment $50, interest rate of 3%

Using this method, you would focus your efforts on paying off the student loan since it has the highest interest rate.

Pay Off Credit Cards Depending On How Close They Are To Being At The Limit

If you are trying to buy a home, you may want to pay attention to this method. One thing lenders look at is how much of your credit you are using. Let’s say these are your credit card debts:

  • -Credit card #1: $7000 balance with a $10,000 limit
  • -Credit card #2: $5000 balance with a $6,000 limit
  • -Credit card #3: $800 balance with a $12,000 limit

Using this method, you would pay off credit card #2 first since it is closer to the limit than the other two cards. This will lead to a higher credit score.

Hopefully, this post has given you some ideas you can use to pay off your debts.