Part of Our Healthy Finance Series:
Accelerated Debt Payoff or Debt-Stacking
If you're attempting to pay off your debt by sending slightly more than the minimum to each of your lenders per month, you're probably getting frustrated at how slowly the balances are dropping.
Guess what? You can make a huge difference in shortening that payoff time, as well as paying far less interest, by making one important change.
It's called Accelerated Debt Payoff - also known as Debt-Stacking - and it's a proven method of retiring your debt in a quick and speedy method.
How does it work? Read on...
First, determine what you're currently paying, in total, toward debt per month. Once you have that figure, rank your debt from the highest interest rate to the lowest interest rate.
Simple so far, right? It gets easier!
Now, you pay the minimum only, not one dime over, to every debt you have EXCEPT for the one with the highest interest rate. For that debt, you pay the minimum plus whatever you have left from that total sum you figured out earlier.
You continue to do this each and every month until your highest interest rate debt is paid off. When that happens, you apply the savings you now have from the paid off debt to the next highest interest rate debt on your list - and so on, and so on.
Before you know it, you'll be debt free.
Why does this work?
It works because you are focusing all your extra money on one debt at a time instead of spreading it out over all of them. By targeting the highest interest rate debt, you're erasing your most expensive liability quicker. As each debt gets paid, and you have accumulated savings to continue to apply, each successive debt is wiped out faster than the one before. You'll be happily surprised at how expedient this process is!
Don't worry if you've already consolidated all of your debts into one big loan. You should still be able to do this, to a certain degree. As long as your monthly payment for the consolidated loan is less per month than your individual payments were combined, you can make this work. Take a bit of what you're saving, and apply it to the consolidated loan payment to see a quicker payoff and less interest paid overall.
For example, let's imagine that your total debt payments before the consolidation came out at $250.00, and your consolidation loan payment is $135.00. You have a savings of $115.00, and even adding a miniscule $10.00 on per month will make a surprising difference in long term payoff time and interest savings.
With this knowledge, you can now apply the money you were already spending in a more effective and financially healthier manner. Which means each dollar you spend toward debt becomes far more valuable and works that much harder for you.
Let's face it, getting out of debt can be a lifelong battle if you go at it incorrectly. Having the proper information will make all the difference in dealing with your debt in the best possible way.
Note: The credit card companies have been given the latitude to practically double your interest rate if you only pay the minimum payment for 12 consecutive months. Your theory on repayment is very good, except for that fact. A person with a credit card debt with interest, say at 12% that only pays the minimum payment each month for 12 months will find their interest raised to 24% with only a one month notation on a bill. That notation is generally in a place where one wouldn't notice it unless they read every word on their bill.
My daughter just recently had this happen to her and I caught a company attempting to do that on an account of mine several years ago.
- Kath, North Carolina
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