Prioritizing Credit Card Debts to Pay Them Off Efficiently

by Josh Biggs in Finance on 16th December 2020

Any endeavor is more likely to be successful when approached strategically. This is particularly true when your goal is to pay off credit card debt. 

Card issuers, giving the appearance of benevolence, require but a minimum payment each month. While this might look like they’re doing you a favor, the reality is they’re taking care of themselves. 

The longer they can keep you paying, the more profit they will earn on the loan in the form of interest payments. This is why prioritizing credit card debts to pay them off efficiently is so important.

Debt Snowball Method

One of the most effective means of credit card debt relief you’ll find, its beauty lies in the fact you can pay off rather large sums in a relatively short period of time. 

To implement this strategy you’ll need to list the amounts of all of your outstanding credit card debts, along with their interest rates and their minimum monthly payments. Next, you’ll need to scour your budget to see how much you can afford to put specifically toward eradicating your credit card debt each month — after all your other financial obligations are met. 

You’ll then prioritize your credit card bills from high balance to low balance, making minimum payments on all but the lowest balance. To that one, you’ll apply the rest of the money you’ve gathered each month. Once that one is paid off, you’ll add that sum to the minimum payment you were making on the next lowest one until it too is eradicated. Continuing in this fashion, you’ll steadily make larger monthly payments on each debt until all are paid in full. 

Debt Avalanche Method

This one works the same way, except you’ll prioritize repaying the debts by interest rate. In other words, you’ll make minimum payments on all except the one with the highest interest rate, and then work your way down through the list, rather than up as you did above.

The advantage of the avalanche is you’ll pay less to eradicate the debt because you’ll kill the accounts with the highest interest rates first. That isn’t always the case with the snowball method. 

The downside of this approach is it can take longer to accomplish if the accounts with the highest rates also have the highest balances. The snowball method gives you more of a psychological boost because that low balance gets paid off rather quickly. Experiencing this success will encourage you to keep going with the plan.

Debt Management/Settlement

Of course, both of those strategies assume your credit card debt is manageable — and you can pull together additional funds to fuel them. Sometimes though, things are too far gone by the time you realize how dire the problem is. 

In cases like this, it can be useful to consult a credit counselor to help you decide which form of credit card debt relief might be best for your situation. This individual will help you prioritize your credit card debts and recommend debt management or debt settlement. 

Both of those methods will find you making payments to an agent who is working on your behalf, rather than directly to your creditors. In a management program, the counselor will negotiate fee and interest waivers with your creditors to make your debts easier to repay. That person will then take over paying the debts for you from the money you deposit with them each month.

Settlement goes one step farther and asks for principal reductions too — in exchange for one-time payments in full to settle the accounts. This money will come from an account into which you’ll make deposits each month — rather than paying your creditors directly — until the amount it contains is sufficient to meet the negotiated agreement.

Each of these methods of prioritizing credit card debts to pay them off efficiently will ultimately help you eradicate those obligations. The approach you choose will be dependent upon your ability to pay and the relative severity of your situation. 

Categories: Finance