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Ask Marietta: Paying Down Debt

Video description

In this episode, Marietta answers the age old question, “What’s the best way to get rid of personal debt?”

Video transcript

Hi it’s Marietta with the Consumer Action Handbook. After our Google Hangout we had so many questions left to answer. We heard from so many people that we wanted to take time to answer as many as possible. And so that’s what I’m here to do, to answer more of your questions.

So without anymore…let’s just dive right in.

Today’s question is really about credit and it’s says, “What’s the best way to get rid of personal debt.”

And there are really two schools of thought on this in the personal finance world.

The first way is based on interest rates. Basically you pay down the debt with the highest interest rate first and then move through all of your debt until you’ve paid off all your debt all the way.

Over time this will allow you to pay less interest on each credit card or each type of credit because you’re paying off things with the higher interest rate first.

The other strategy is more so based on the balance on the debt, but it’s in the reverse. You pay off things with the lowest balance and then move up the line. So if you have several accounts you pay off something with a $500 balance completely and then you pay off things that have a $1000 balance and move up the line.

The strategy behind this gives you a sense of accomplishment and allows you to have some momentum. You’ve seen success, you’ve seen that you’re able to do this that you’re able to tackle your debt and pay it down and get rid of it so it gives you the momentum and strength and just the willingness to stick to it because you’ve seen that you’ve done it and you can continue you to do it.

Regardless of what strategy you use, you should pick one that works best for you. Knowing what your motivated by is a good thing. If you’re motivated more so by rationality and numbers, maybe the interest rate version works better for you. But if you need something to get you started and give you some steam to keep going, maybe using the balance as your motivating factor is the best one.

Regardless always of which method you use, you definitely want to make sure you’re making at least the minimum payments on all of your accounts because that demonstrates you’re making significant strides to managing your credit reports and credit history.

So thanks for your question.

If you’d like to ask us a question, we’d love to hear from you! You can write us by postal mail to Ask Marietta, 1800 F St. NW, Washington DC, 20405, email us (askmarietta@gsa.gov) or tweet us using the hashtag #AskMarietta.