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Sunday, September 28, 2008

Breaking It Down--A Debt Reduction Strategy

A sampling of snowballs.Image via WikipediaI enjoyed this post from Master Your Card
outlining a strategy for getting out of debt. Seems there is some controversy about deciding in which order to pay off your debts. The MYC author recommends paying off high-interest debt first (which is what I do), while David Ramsey recommends the snowball method, wherein the debtor tackles the smallest debt first and then applies those same payments to next next smallest debt. This is supposed to give you a sense of accomplishment as you retire each debt, modifying your behavior towards retiring your debt.

I suppose it depends on how you're wired which works best for you. I also guess the important thing is setting and sticking to a strategy in the first place.

Oh, and the 1st strategy, according to MYC? Stop using the bleeping credit cards! Duh, huh? I wish I'd thought of that a couple of years ago!
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personalfinancesolution said...

You are so damn right!!
Debt is really a burning question now-a-days. Like most of the Americans my dad also had debt. Its me who has suffered and hence I know how irritating and disturbing this debt problem can be. Thank God my family is debt-free now.
Thank you for writing this post.
But there are few things one should not do to get out of debt.

ConnieB said...

Mwahahaha (just kidding)

Have to play devil's advocate here.

I just finished Liz Pulliam Weston's book about raising your credit scores.

She recommends paying off the card with the balance closest to the limit first - since this will lower your debt to credit ratio and raise your credit score fastest.

This is probably the option someone who wanted to finance a house or a car in the near future would want to take - but in every other way it does not make financial sense.

One more example of how raising your credit score is not cheap!

Polly Poorhouse said...

Personalfinance solutions makes some good points at the link about pitfalls to avoid.

Connieb raises an interesting issue--the right thing to do depends very much on where you are in your life. At this point, I'm much more concerned about reducing my debt (and staying in my house) than I am about my credit score. But if were looking to buy a house in the near future, my priorities would be different.

I don't know the answer to this, but it seems like whatever debt you pay off, the ratio of debt to total credit availalbe would be the same, unless you close accounts where you have paid off the card.

I wonder if the credit bureaus penalize borrowers who are maxed out on some of their accounts, regardless of their ratio. It would be interesting to know.