How to Use Power Pay to Pay Off Your Debt Faster
It's the Monday after Black Friday and Small Business Saturday. Did you end your weekend with no balances on your credit cards? If so, you're probably in the minority. But if you did charge purchases and can't pay them off right away, it's a good idea to start thinking about your pay off strategy. Depending on your balance, making only the minimum payment can often take years...yes, YEARS. So to pay off your debt faster, try the power pay method.
Pay Off Highest Interest Rate First
First gather all of your debt information, including credit cards, medical debt, student loans, car loans, personal loans, lines of credit, etc. Determine which of your debts has the highest interest rate. Then, pay extra toward that debt until it's paid off. The debt with the highest interest rate is your target to pay off first because it's costing you the most money.
Once you pay off the debt with the highest interest, take the payment you were making and add that to the minimum payment of the next highest interest rate debt. Continue this process until all your debts are paid off.
This power pay method takes a while to show progress, but in the long run will save you the most money.
Pay Off Lowest Balance First
Instead of the highest interest, you'll be focusing your attention on the debt with the lowest balance. Just like in the above method, pay extra toward this debt and when it's paid off, add that payment to the minimum amount due. Continue doing so until all debts are paid off.
This method won't save you as much money in the long run; however, it will help you get rid of a monthly payment faster. So if you need a little wiggle room in your budget, this is the approach you should take.
Power Pay on a Debt Management Plan
The above methods are great if you're ready to tackle your debt on your own. However, if you need a little support, our financial specialists at LSS can help you create a realistic budget and a Debt Management Plan (DMP). Typically you can save money right away with lowered payments and interest rates. You can pay more whenever you want without penalty and you get to choose where your extra payment should be applied. Plus, on a DMP you're making one monthly payment on unsecured debts (excluding student loans) to make repayment simpler.
To see if a DMP is right for you, call LSS at 888.577.2227 for your free session or click here to GET STARTED ONLINE.
Don't Forget About Savings
While you need to make higher than minimum payments for these methods to work well, don't forget about emergency savings. Don't use all of your extra money to go toward debt if you have nothing in savings. If you're sending $100 extra toward your debt payment, then set aside $25 or $50 for savings. Because if you have an unexpected expense come up you don't want to be forced into accruing more debt.
Regardless what approach you take, start now. Paying off debt will provide you with reduced stress, financial freedom, and financial stability.
Author Elaina Johannessen is a Program Director with LSS Financial Counseling