Keep paying at least the minimum amount owed on all of them, but focus any extra money you can spare on the debt with the highest interest rate. After you've paid off that balance, tackle the one with the next highest interest rate, then the next, until you've taken care of all of the debts on your plate.
In general, there are three debt repayment strategies that can help people pay down or pay off debt more efficiently. Pay the smallest debt as fast as possible. Pay minimums on all other debt. Then pay that extra toward the next largest debt.
Pay off your debt and save on interest by paying more than the minimum every month. The key is to make extra payments consistently so you can pay off your loan more quickly. Some lenders allow you to make an extra payment each month specifying that each extra payment goes toward the principal.
What Is Repayment? Repayment is the act of paying back money previously borrowed from a lender. Typically, the return of funds happens through periodic payments, which include both principal and interest. The principal refers to the original sum of money borrowed in a loan.
Start by paying off your debt
You can begin by writing down the details of all the loans that you have to repay, along with the amount and the interest rate. “If you have taken a lot of debt, first start by repaying the loan with highest interest rate," said Agarwal.
The snowball method tackles your lowest balances first, offering small, more immediate wins. The avalanche method prioritizes higher-interest debts, reducing your long-term costs most. Read more stories from Personal Finance Insider.
What is the best strategy if you can't make a payment on a debt? Notify the creditor as soon as possible in an attempt to work out a modified payment plan.
The "snowball method," simply put, means paying off the smallest of all your loans as quickly as possible. Once that debt is paid, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. Ideally, this process would continue until all accounts are paid off.
If you have debt, focus on paying off the highest interest rate balances first, then funnel money into your savings goals, she says. After you're satisfied with your savings, consider putting extra payments toward your "good debts," like a mortgage or student loans. Visit Business Insider's homepage for more stories.
If you'd like to buy a home, carrying credit card debt doesn't have to keep you from fulfilling your dream. But paying down the debt will lower your debt-to-income ratio (DTI) and could strengthen your credit score. That, in turn, will help you qualify for a home loan and potentially score you a lower interest rate.
Which method of payment is almost always cheaper than using credit? Cash.
When you pay cash for a vehicle, you don't have to worry about making car payments month after month, year after year. You could also secure a better deal from particular sellers as a cash buyer. Paying cash also means you won't pay any interest on your purchase or need to apply and qualify for financing.
If you have credit cards, keeping a low balance-to-limit ratio (a.k.a. credit utilization ratio) might help you earn and keep a better credit score. Credit utilization is largely responsible for 30% of your FICO Score.
Cash makes it easier to budget and stick to it. When you pay with the cash you've budgeted for purchases, it's easier to track exactly how you're spending your money. It's also an eye opener and keeps you in reality as to how much cash is going out vs. coming in from week to week or month to month.
It's best to avoid using savings to pay off debt. Depleting savings puts you at risk for going back into debt if you need to use credit cards or loans to cover bills during a period of unexpected unemployment or a medical emergency.
If you're trying to diminish the total sum owed, you should use your extra cash to pay off your debt with the highest interest rate first. For example, if your mortgage has a high interest rate, it might behoove you to pay off this loan first, even if your auto loan has a smaller balance.
You may have heard carrying a balance is beneficial to your credit score, so wouldn't it be better to pay off your debt slowly? The answer in almost all cases is no. Paying off credit card debt as quickly as possible will save you money in interest but also help keep your credit in good shape.
Senator Elizabeth Warren popularized the so-called "50/20/30 budget rule" (sometimes labeled "50-30-20") in her book, All Your Worth: The Ultimate Lifetime Money Plan. The basic rule is to divide up after-tax income and allocate it to spend: 50% on needs, 30% on wants, and socking away 20% to savings.
Kevin O'Leary, an investor on “Shark Tank” and personal finance author, said in 2018 that the ideal age to be debt-free is 45. It's at this age, said O'Leary, that you enter the last half of your career and should therefore ramp up your retirement savings in order to ensure a comfortable life in your elderly years.