Three Ways For Managing The Payoff Of Large Amounts Of Debt

10 June 2015
 Categories: , Blog


Do you have a significant amount of debt in the form of multiple credit accounts? It can seem like paying down all of these accounts can be an insurmountable task -- but there are a few tried and true methods available for tackling debt one item at a time. Here are three of the most popular ways that are often suggested by credit counselors.

1. The "Snowball" Method

The snowball method stacks your debt from the highest amount of debt to the lowest amount of debt. Your payments then go to the lowest amount of debt so that you can pay off your debts faster. While this method doesn't save you the most amount of money -- and thus isn't the most financially responsible method -- it has a psychological benefit. Because you can quickly pay off your smaller debts, your debt will not seem so large and unwieldy. Some individuals use the snowball method to pay off their smaller debts and then tackle their larger debts ranked by interest rate instead.

2. Done on Last Payment Method

Done on the last payment method is a little complex, but similar in theory to the snowball method. Here, you need to calculate which debt can be paid off fastest. You get this number by dividing the balance amount by the minimum monthly payment. You then pay off whichever account requires the least amount of payments first. While it may seem as though the DOLP method is the same as the snowball method, it isn't, because different cards can have different minimum monthly payments even if they have higher or lower balances in relation to other accounts.

3. Lowest to Highest Interest

Finally, this method makes the most financial sense even though it may not convey the psychological benefits of DOLP and snowball. With the lowest to highest interest method, you pay off your balances according to the highest interest first, regardless of balance. If you have a $5,000 balance at 20% interest and a $500 balance at 5% interest, putting $500 towards your higher interest balance rather than closing out the lower interest account entirely will save you 15% in interest fees.

There are additional methods that are often used in connection with the above three methods, such as always putting extra money -- such as tax refunds -- into your debt payments to pay them off faster. But if you have a truly large amount of debt, it's usually best to call a credit counseling agency to help. Often, the credit counseling agency will pay for its own fees. You can discuss debt counselling with Moses Advisory Group Inc. or another similar company for more information.


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