debt

A snowball's chance to leave debt behind?

Steve BucciQuestionDear Debt Adviser,
I've read your articles and played with Bankrate calculators, regarding the best method to pay down a mountain of debt or at least start a debt snowball (I love that term). The conventional wisdom is to pay down the highest-interest credit card first. However, I don't believe this strategy will help my monthly budget. Others say to start by paying off low-balance accounts first, then roll that payment over to the next account -- the so-called debt snowball. Would you advise against a snowball strategy? In my case, all of my credit cards have about the same (really high) interest rate.
-- Dana

AnswerDear Dana,
Recently, at one of my favorite clothing stores, I was shopping for a shirt and a salesman who knows me well told me not to go by size alone. That's because some large shirts will look great and others won't. "It's not about the size, Stevie," he said. "It's about the fit."

My philosophy on paying down debt has always been: Whatever motivates you to keep paying and stop charging is what works best. In other words, the solution has to fit you, not the other way around. So, I suggest that you have a talk with yourself and identify what will most motivate you to make the necessary changes in your spending habits, to stop adding to your credit balances and instead pay them off as quickly as possible.

Some people like to see quick progress, so paying off a small balance account and moving from owing five creditors to only four creditors is a good motivator.

Others may be trying to improve their credit scores. They will want to first pay down accounts with balances closest to their credit limits. That will improve their utilization ratio, a factor used in calculating scores.

Still others are tired of paying high interest rates and want to see less of their hard-earned money going to feed insatiable finance charges.

So, look for what fits and motivates you the most and then get going. It sounds like you are a fan of paying off small-balance accounts and then moving on to larger ones. This is a great strategy and has been used successfully by many people. However, while focusing on one debt, it's important that you make at least the minimum payments, on time, to all of your accounts.

The Credit CARD Act does prevent you from being hit with a default interest rate of 30 percent for one late payment (you must be more than 60 days late for that to happen). However, it doesn't prevent you from being charged a $30 late fee, or being tagged with a delinquency on your credit report.

Try to build emergency savings while you are paying down your debt. This may sound at cross-purposes to getting out of debt, but it isn't. By putting some money in savings, if an expense comes along you'll be better suited to handle it without using credit. One of my truisms is that if you don't stop charging, you'll never get out of debt.

Because you have (really high) interest rates on your credit cards, you might consider contacting a nonprofit credit counseling agency and speaking with a certified counselor. Your counselor will go through your budget with a professional eye and help you find additional ways to reduce spending. Keep plugging away, and before you know it you'll be free of credit card debt.

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