The Best Way to Pay Off Debt

Photo (cc) by tony.evans

The average American household debt was $15,799 as of July, according to CreditCards.com.

While people have a hard time dealing with debt, they also have a hard time talking about it. Another interesting (and weird) statistic from CreditCards.com is that Americans would rather discuss their salary, weight, politics, or religion with a stranger. They found the only topic of discussion rivaling debt as a taboo was “details of your love life,” with only 19 percent willing to discuss.

And if people can’t talk about debt, maybe that’s why new research shows most of us take the wrong (or at least more expensive) approach to paying it back – paying off the smallest accounts first. Or is there another reason? In the video below, Money Talks News founder Stacy Johnson explains the research behind the psychology of debt management, including why people often use this strategy. Read on for a debt calculator and to learn more about both approaches to tackling those accounts.

Like Stacy said, the most important thing is motivation. If you aren’t going to make consistently paying down debt a priority, you lose out regardless of strategy. So while there is a clear, mathematically correct approach to dealing with debt, it’s important to do what works best for you. Here are the two common approaches:

Prioritizing high-interest accounts

In this model, you make the minimum payment on every debt except the one with the highest interest rate, which is the one costing you the most money over time. For that debt, you throw in whatever you can regularly afford beyond the minimum until it’s paid off.

Once that debt’s gone, your debt-paying budget stays the same – you just shift the higher payment to the debt with the next-highest interest rate, and go on down the line.

The obvious advantage to this model is you save the most you can over the long term. The downside: Progress may appear to be slower than it actually is. Having a large number of debts may feel more stressful than the fact you’re throwing more money at debts than necessary to eliminate them.

Paying off low balances first

As with the first model, you pay the minimum on all but one debt and “snowball” the payments from one debt to the next as they disappear. The difference here is that you focus on the smallest debts, allowing you to knock accounts off the list faster.

The advantage? Having fewer accounts to juggle feels good. It’s a result we can easily see: Numbers shifting downward is not as impressive or obvious as a big zero. Some people need that to stay motivated. Unfortunately, this means you’re actually making slower progress on your overall debt because those big-interest accounts are accruing.

Is this hard to visualize? Think back to sixth grade and the mathematical order of operations: Multiplication and division (i.e., percentages) come before addition or subtraction (i.e., payments). Or look at it this way: You’re trying to bail out your sinking ship, but a bunch of creditors are standing behind you with little kiddie beach-pails, pouring more water in. While it may feel good to turn and shove those guys off your boat right away, there’s a jerk with a huge bucket standing – and grinning – at the other end of the ship. You really ought to run and tackle him first.

How to decide on the best approach

The fact is, the bucket sizes are different for everybody. We all have different situations, with a number of debts of varying sizes and interest rates, and with different income levels. Fortunately, there’s a much more concrete way to figure out how to handle debt that works for everybody. Being able to plug your specific numbers in and see how much money you lose flipping between the two methods can help decide.

So go check out Unbury.me, a clean and easy-to-use calculator that can test both methods with your input. You can add as many loan balances as you want and you’ll get back a graph and payment breakdown, along with total interest paid and a debt-free date. You only have to plug the numbers in once, and you can switch between “Avalanche” (high-interest style) and “Snowball” (low-balance style) with one click.

I’ll give a personal example I ran through the site, which I guess puts me in that 19 percent who disclose debt details. (But I’ll leave my wife out of the discussion.) I have three subsidized grad student loans that look like this:

  • Debt 1: $7,970.92, $95/month minimum, 6.8-percent interest.
  • Debt 2: $1,131.53, $50/month minimum, 6.8-percent interest.
  • Debt 3: $6,799.07 $80/month minimum, 6.3-percent interest.

I currently put about $300/month toward these and hope to increase it as time goes on. But at the current rate, with the high-interest approach, I’ll be done in September 2016 and will have paid an extra $2,855.86 beyond the outstanding loan amounts. With the low-balance approach, I’ll be done by October 2016 with an interest bill of $2,924.83. The difference is just $69 for me because my interest rates are not far apart.

Because that’s a small difference (and because some student loan interest is tax-deductible), I don’t really care. I’ll opt for the low-balance approach like most people, and pay off that small loan by next May instead of by August 2013. It’s one less thing for me to keep track of, for about the cost of one monthly payment. Your situation could be very different, though, and that’s the value of the calculator. Try your numbers and see what makes sense to you.

Need more debt help? Check out a step-by-step guide to debt strategy, or how to find trustworthy credit counseling. Money Talks News founder Stacy Johnson’s also written an entire book on debt ($10 on Amazon) that’s helped hundreds of people. It’s called Life or Debt.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
6 Reasons I Will Never Trust Suze Orman
6 Reasons I Will Never Trust Suze Orman

Beware: The self-proclaimed personal finance expert has a track record that suggests more sizzle than steak.

16 Products You Absolutely Do Not Need
16 Products You Absolutely Do Not Need

There are plenty of great ways to spend your money, but you can safely leave these products on the store shelf.

New Ways to Save Money on Insurance of Every Kind
New Ways to Save Money on Insurance of Every Kind

Tech startups are making it easy to find the best rates for all kinds of insurance policies — and get covered fast.

10 Things That Can Ding Your Social Security Payments
10 Things That Can Ding Your Social Security Payments

Here are 10 things that could mean less money in your pocket during retirement.

The 9 Best Home Insurers for Customer Satisfaction
The 9 Best Home Insurers for Customer Satisfaction

These are the only homeowners insurance companies to earn above-average scores for customer satisfaction.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

9 Deep Discounts Available on Amazon This Friday
9 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

Do This in the Car If You Want to Avoid COVID-19
Do This in the Car If You Want to Avoid COVID-19

It takes just seconds to take this simple preventive measure.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

15 Products You Need — Even If You Didn’t Know It
15 Products You Need — Even If You Didn’t Know It

Discover some must-have products on Amazon that you didn’t even know you were missing.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.