Debt

Why You Should Focus on One Debt at a Time

Debt blocksDo you carry a balance on more than one credit card?  If so, it helps to formulate a strategy to pay them all off quickly.  Obviously you should avoid using them any more so your debt doesn’t grow, and you need to make at least the minimum payment on each card.

But after that, your best bet is to focus all your attention on just one card at a time.  There’s two reasons why you should maximize your payments toward just one debt instead of spreading it all around evenly.

First, you can save money and pay less in interest charges.  Odds are the interest rates on your cards are all different. By paying off the card with the highest interest rate first you’ll be reducing the amount you pay in finance charges and you’ll be able to pay it all off faster.

Second, you get a very powerful psychological win by seeing at least one balance dramatically fall.  If you just pay a little bit here and a little bit there you can easily get frustrated because it feels like you’re not making any progress.  By focusing your energy on one debt at a time you can do a lot more damage and that will motivate you to keep chipping away.

According to financial author and radio personality Dave Ramsey, the psychological boost you get from knocking off small debts will give you the momentum needed to knock out the big ones. He suggests ignoring interest rates and starting with the smallest balance first. When that debt is all gone you move on to the next smallest one and so forth.  He calls his method the debt snowball.

While Ramsey certainly has an ardent group of followers, simple math will tell you that is makes far more sense to pay off the debt with the highest interest rate first. The faster you pay down that debt the better!

Combine and Conquer

Consolidating your debt will allow you to combine multiple high-interest credit card balances into just one monthly payment with a lower interest rate.  This way you can focus your complete attention on just one debt and pay down your balance faster without increasing your payment amounts.

An easy way to consolidate debt is by taking advantage of a balance transfer offer with a low interest rate. Many cards offer zero percent interest for an introductory period and then the rate increases. Keep in mind that balance transfers typically come with a transfer fee between 3% and 5%, so that will eat into your savings.

Another option for consolidating high-interest debt is to take out a home equity loan or line of credit. You’ll get a bit of a bonus using this method because the home equity interest payments are usually tax-deductible. However, there is a significant downside because you’ll be putting your home’s equity on the line and if you don’t make your payments you could lose your home.

If you do decide to consolidate your debt, remember that it’s important to stop spending and avoid using your credit cards going forward.  If you don’t change your spending habits you’ll just end up right back where you started from.

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Mike Collins

Mike Collins

Mike Collins is a professional blogger and freelance writer. He’s also a husband and father of three children who keep him very busy. You can read more about his quest to achieve financial freedom for his family at WealthyTurtle.com

21 Comments

  1. May 21, 2014 at 7:16 am — Reply

    I’m actually surprised that Dave Ramsay has such a big following. His advice might sound good, but as you state, it’s actually not the best course of action.

    • Mike Collins
      May 21, 2014 at 8:10 am — Reply

      Ramsey is definitely a charismatic guy who knows how to sell himself and his ideas.

    • May 29, 2014 at 8:51 am — Reply

      Discouragement is perhaps the biggest enemy to people in debt. Dave Ramsey’s advice may lead to slightly higher interest charges, but getting a win under your belt could be far more important.

  2. May 21, 2014 at 8:20 am — Reply

    The debate regarding the best way to pay down your debt will rage on forever, BUT the most important thing is to do SOMETHING. Spreading your money evenly, or concentrating on one debt at a time, either way….progress is the most important thing.

    • Mike Collins
      May 24, 2014 at 9:35 am — Reply

      You’re right, it is easy to get caught up in paralysis by analysis and the most important thing is to take action.

  3. May 21, 2014 at 8:43 am — Reply

    Like Travis said, I think the key is to start doing something. That said, I went this basic route when I was paying off my cards years ago. I consolidated all my debt and had four cards. They all lowered the interest, with the majority of them to 0% or very close and one that stayed around 10%. I killed that one first and then just went from there killing each card on its own.

    • Mike Collins
      May 24, 2014 at 9:35 am — Reply

      Great job and focus to kill them all off!

  4. May 21, 2014 at 9:00 am — Reply

    I agree that progress is important, though I’ve employed this method myself. I only have two student loans though, so it was a lot easier for me! My smaller balance happened to have a higher interest rate so it was a win-win for me. It hurt to ignore the other, but making bigger payments toward the smaller loan has been a great decision.

    • Mike Collins
      May 24, 2014 at 9:36 am — Reply

      As you see the yourself making progress that motivates you to keep going. nice job!

  5. May 21, 2014 at 9:38 am — Reply

    If you have a lot of debt you want to roll into a home equity line, which I think is a bad idea because you are putting your home at risk and most people I know who do this just rack up their credit cards again, only the interest on $100,000 of the home equity line would be deductible for tax purposes. This is an IRS limitation which most people do not know about.

  6. May 21, 2014 at 10:36 am — Reply

    This is great advice. The way that I pay off debt quickly is by paying off my smallest debt first and then working on the largest debt. I agree with the psychological nature of seeing yourself pay off your debts. That motivation was literally the only thing that kept me going when I was drowning in debt. My aim is to have my mortgage as the only debt at the end of the year.

  7. May 21, 2014 at 11:11 am — Reply

    There are definitely different types of debt repayment strategies, but you hit the nail on the head at the end of this when you talked about changing your spending. It doesn’t matter how much you want to pay down debt, if you are not controlling your spending, then you will just continue to add to the problem and never get ahead.

    • Mike Collins
      May 24, 2014 at 9:37 am — Reply

      Thanks Shannon. Changing your spending habits is key because if you don’t you’re just going in circles.

  8. May 21, 2014 at 1:56 pm — Reply

    That psychological boost from paying down debt is a very real thing. Of course, it needs to be fairly substantial to really make an impact, but it can really motivate you to keep working on reducing more. The sooner you can be free of it the better!

  9. May 21, 2014 at 4:14 pm — Reply

    I have so far been following the opposite of the “snowball” method to pay down by debt, and using the “avalanche” method to pay it down as you had stated – paying the highest interest loans off first. It was a bit slow going at first as my large private loan had the highest interest rate, but now that I have been able to refinance that loan to a lower interest rate the victories have been coming quickly. I have to say that the second point you make about achieving a psychological win is extremely satisfying and motivating. It’s great when I see another loan balance hit $0.

  10. May 21, 2014 at 7:28 pm — Reply

    I strongly agree. It is important to focus on one debt at a time so that you can pay it faster. My mom did that, she pays the less first and saved for the big debt she has. And now, she don’t have debt anymore.

  11. May 21, 2014 at 11:08 pm — Reply

    We use a combo of avalanche and snowball. We also put some debt on our home equity into a new mortgage. I agree it’s very important to ensure the spending is controlled so that it doesn’t happen again. We are guilty of doing this more than once. :-(

  12. May 22, 2014 at 1:27 pm — Reply

    I agree that paying down the debt with the highest interest rate makes the most logical sense, but I understand the concept of starting with the smallest debt just to get the momentum going and to feel and see that you’re making real progress.

  13. May 23, 2014 at 6:38 pm — Reply

    My fave point in this whole article is your tip about choosing to stop spending and using those credit cards after you’ve made a decision to get out of debt. Without that commitment to spend less, chances of failure are super high. Great post, Mike!

    • Mike Collins
      May 24, 2014 at 9:39 am — Reply

      Thanks Laurie! I think changing your mindset and cutting spending are really important if you want to be debt free for the long term.

  14. June 11, 2014 at 9:17 pm — Reply

    When it comes to paying off debt, all that matters is you pay it off. If paying the smallest balance first is what works for you, then that is what you should do. Sure paying the highest interest rate is the smartest financial move to save money, but it isn’t the smartest financial move if it’s one that you aren’t able to see it through to the end.

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