Small Business Personal Finance: 3 Methods of Attack for Paying Down Your Debts

When you’re cleaning up your finances and making a serious effort to pay down your debts once and for all there are several questions you might have. One of the most common inquiries regarding paying off debts is which order you should tackle your outstanding balance? Unfortunately there’s really no easy answer.

As Trent Hamm recently highlighted on The Simple Dollar there are multiple schools of thought when it comes to arranging your debt hitlist. Each method has its own pros and cons, which likely means that the choice will come down to your situation and personality. Just remember that, in all cases, you’ll want to keep making payments on all of your accounts, even if they’re not the one you’re currently targeting.

Here are three popular plans of attack for paying down your debts:

Pay off the smallest debt first

The first idea is to arrange your debts by how much you owe and then start with the smallest balance. While this means that your largest debts remain looming, the small victories you experience from ridding yourself of lesser debts can help you power through. Think of it as a video game where the levels get progressively harder but, by the time you make it to the final round, you’re a pro.

This method is great if you’re in need of some encouragement along the way. It may seem silly but watching your debts fall one by one can be a tremendous feeling that inspires you to persevere even when it’s time to take down those big balances. However, if you want to really make a dent in your debt, this might not be the best method.

Pay off the largest interest rate first

One of the reasons debt can pile up on so many Americans so quickly is because of high-interest rates. These costs can make it can feel like someone keeps dumping dirt on those trying to dig their way out of debt. That’s why it makes sense to take aim at the guy with the biggest shovel first.

Mathematically this plan will allow you the greatest amount of savings. The problem is that sometimes your debt with the highest interest rate is also your largest balance. Although that’s even more motivation to pay it off as soon as possible it can be an admittedly daunting task. But if you have what it takes to show your debt who’s boss, then this is the way to do so.

Pay off the debt that’s closest to maxing out first

The last method is a little less straightforward than the others and involves arranging your debts by how close your account is to hitting its credit limit. This matters because of the way FICO scores are calculated. In fact the amount of available revolving credit you have on hand accounts for 30% of your scores.

Under this plan you would be paying off credit cards before other debts such as loans. Incidentally this likely means you’ll be paying off the debts with the higher interest rates first as well. One you’ve paid your high balance percentage credit cards your other obligations can be arranged in whatever order your choose (including the aforementioned methods).

There are several ways to approach paying off your debt that are completely valid. More important than how you tackle your debts is that you actually make the effort. By choosing one of the methods above or creating a hybrid you can be on your way to becoming debt free for good.