Slow, fast or fastest? There are many speeds at which you can tackle your debts and that is influenced heavily by your situation.
If you’re in the research stage of investigating the quickest ways to manage your debts, you’ll probably find a lot of conflicting advice regarding what’s the fastest ways to pay down debt. If you truly want to get a handle on your finances, here are three debt management methods you should know about it.
1. MAKE MINIMUM PAYMENTS: THE SLOW METHOD
If you’ve ever carried a balance on your credit card, you’re familiar with the notion of a minimum payment.
This payment typically amounts to only two to five per cent of the balance owed. The catch is that if you make only the minimum payment every month, you could end up paying more than twice the original amount. This is because your interest rate will continue accumulating on your debt each month. The lower your payments are, the longer it’ll take to pay down.
However, let us be clear: making minimum payments is still better than not making any. Missed payments will tank your credit score which can negatively impact you for a long time. Any loan you manage to get in the future will come with higher interest rates and will be that much harder to pay down.
IF YOU’RE STRUGGLING TO MAKE YOUR MINIMUM PAYMENTS OR ARE CONSIDERING A MORE AGGRESSIVE APPROACH TO TACKLING YOUR DEBTS, CONSULT WITH A LICENSED INSOLVENCY TRUSTEE OR CREDIT COUNSELLOR FROM D. & A. MACLEOD COMPANY BEFORE YOU REACH THE POINT OF NO RETURN.
2. MAKE REGULAR SET PAYMENTS: THE FASTER METHOD
This debt management method is sometimes referred to as the snowball method: a small amount gathers momentum and grows more impactful over time.
Let’s say you start by making the minimum payment of $15. If you don’t accrue any further debt, the minimum payment will be less than $15 on your next bill. If you keep paying $15, even as the required minimum payment get progressively smaller, you’ll start paying off more of the principal each month.
This method allows you to pay down an increasingly bigger percentage of the balance each month. It’s much faster than making minimum payments, which only amounts to paying two to five per cent of the balance every month.
3. Prioritize High Interest Debts: the fastest method
IF YOU HAVE SEVERAL LOANS OR MULTIPLE CREDIT CARD BALANCES, IT’S RECOMMENDED THAT THE BIGGEST PAYMENT BE APPLIED TO THE LOAN WITH THE HIGHEST INTEREST RATE. PAYING EXTRA ON HIGH-INTEREST LOANS REDUCES THE OVERALL INTEREST YOU’LL PAY OVER TIME. WHILE THIS METHOD IS THE FASTEST, PRIORITIZING THE DEBT WITH THE LOWEST BALANCE INSTEAD OF THE ONE WITH THE HIGHEST INTEREST RATE MAY WORK BETTER FOR YOU. THIS IS BECAUSE CLEARING ONE DEBT CAN MOTIVATE YOU TO SETTLE ANOTHER AND KEEP UP GOOD FINANCIAL HABITS OVERALL.