Debt Reduction Methods

February 21, 2009

I’ve been reading a lot of PF Blogs and websites about debt reduction lately looking for some tips that will help expedite the process of paying off my debts. It amazes me how so many people feel strongly about what they consider the “best” way to pay off debt. Dave Ramsey’s Disciples tout his Debt Snowball as the “only” way to do it, paying off debts in order from Smallest Balance to Highest Balance. Many of the more mathematically inclined PF Bloggers tout the traditional method of paying off debts beginning with the one with the Highest Interest Rate, which I’ve now seen referred to as the Debt Avalanche method. One of my favorite Bloggers/Podcasters, NCN, has even combined the two methods and coined it the Debt Deluge, where he first lists the debts Lowest Balance to Highest Balance then draws a line at the midpoint and reorders the lower half (Highest Balance Debts) from Lowest Interest Rate to Highest Interest Rate. Sticking with the Snow theme, still others tout the increased momentum of Snowflaking – throwing all extra money picked up during the month that is not already earmarked for a budget item and throwing that at your targeted debt as soon and as often as possible.

These are all great ideas that help organize and focus your debt reduction plan. I am one of those people that feels that Personal Finance is just that, Personal, and whatever works best for you is the best method. For me, I have set up a plan that is essentially a combination of all of these methods that makes the most sense for me. But sorry, I haven’t given it a snow-related name yet. Perhaps I should call it the Snowbank , the Snow Storm, or something clever like the S’no More Debt method.

Anyway, being a numbers-guy, my brain won’t allow me to pay a debt with a low interest rate before a higher interest rate…especially if they both have a high enough balance that neither will be paid off in the next few months. So I have to pay off my higher interest rate debts first, but I don’t just list them and start there. I first try to consolidate my debts and transfer the balances of the highest rate debts to a lower interest rate card. This in effect allows me to set up a Debt Snowball (paying my lowest balance debt first) that also happens to be a Debt Avalanche since now my largest balance debt is also my lowest interest rate debt. Sounds like a no-brainer to me, especially if you are able to get a VERY low interest rate (0.00% – 1.99%) with NO or a reduced balance transfer fee. Here is an example of what I’ve done below.

debtfeb09

So I will be concentrating on the Citi MC which has the highest interest rate and the lowest balance. Also, with the combination of them having recently bumped the interest rate up to 16.99% from 9.99% due to “the current tough economic conditions” they are experiencing (After receiving BILLIONS of our tax dollars) and their CRAPPY CUSTOMER SERVICE,I am determined to pay off that balance as quickly as possible.

I will also look into transfering additioanl debt from either the Citi MC or the Amex Blue to take full advantage of the lower rate and start to quickly throw money at the higher rate debts.

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