Carnival of Debt Reduction

Regardless of how you slice and dice things, paying off consumer debt takes a huge amount of discipline. It’s usually far harder — and far less fun — to get our of debt than it is to get into debt. (This isn’t true in all cases, of course; not everyone gets into debt because of reckless shopping. Some times bad things happen.)

To get rid of large (five- or six-figure) consumer debt in any reasonable time takes sacrifice to make those extra payments. Extra payments will speed the debt reduction process along, regardless of where the payments are made, because extra payments mean less interest gets charged to those accounts.

But, the $64,000 question is: Which debt should be paid off first? (If the debts are large enough, it could be a $64,000 question!)

There are pros to slaying a dragon quickly by paying off the lowest balance first.  But there are also pros to taking the longer road, which is to pay off the highest interest rate first. Taking this route means (possibly) that getting rid of the first debt will take longer (if the highest-rate debt is not also the one with the smallest balance) but it means that the interest savings will be the highest.  Paying down an 18% debt over paying down a 9% debt results in twice the accumulated interest savings.  It gets everything to zero with the least financial pain.

But again, in the grand scheme, it doesn’t matter which debt gets paid off first.  The important thing is that they all get paid off eventually.

Here are this week’s lovely articles on debt reduction:

• Momvesting explains how to remove credit card debt the stubborn way.
• Canadian Finance Blog admits that it’s tough to stay motivated when paying down debt.
• No Credit Needed hits debt reduction inspiration from a number of angles.

Thanks!

Debt reduction takes a lot of discipline.  People usually don’t get into lots of consumer debt overnight, and people can’t get out of debt overnight either.  Doing so takes regular payments beyond the minimum payments, because making just the minimum payments is a surefire way to make your servitude to that debt last as long as possible.

But, given the option of throwing extra money at one of your debts, which one should you choose to tackle first?  Fortunately, it ultimately doesn’t matter a whole lot, but one good choice is pay off the debt with the lowest balance first. Given a $5,500 car loan, a $10,000 student loan, and a $1,500 credit card balance, a decent choice would be the $1,500 credit card balance, regardless of which debt had the highest interest rate.

Why pay off the lowest balance first, even if there are other higher-interest-rate debts?

Hitting the highest interest rate first would save more money in interest, but that’s not the primary motivation for paying off the smallest debt first.  The main reason to knock out the little debt is purely a matter of psychology.  Killing a debt is a great accomplishment. Killing a small debt is still killing a debt, right?  That’s it.  And once that little debt is out of the way, what was being paid on that debt can be applied to the next debt.  Because this debt was the smallest one, this turbo boost happens sooner rather than later.

Regardless of which debt you decide to pay down first, the point is to choose one, and hit it hard!

Congratulations to the Green Bay Packers for beating the Pittsburgh Steelers in Super Bowl XLV.

Since it’s unlikely that you were able to score 200% return on your tickets like those 400 people at yesterday’s Super Bowl who were denied their seats — and consequently got triple their money back — here are this week’s debt-reduction-related posts.  Personal debt reduction articles are up top.  That was the main reason I started this carnival, and it’s what I want to highlight!

• Yes, I Am Cheap has a great debt reduction update.  Keep up the great work!
• Credit Card Assist has a nice all-in-one guide to various ways to reduce your debt.
• The venerable No Credit Needed explains how he got out of debt.

Have a great week!

Here are this week’s debt-reduction related posts:

• Retire Happy Blog says that it’s time to get rid of debt.
• Money Walks gives some ways to avoid debt elimination scams.
• Digerati Life explains how getting a peer-to-peer loan can reduce the interest you pay on your credit cards.
• One Money Design gives some tips on dealing with debt collectors.
• CardHub talks about the statute of limitations for credit card debt in the states.

Thanks!