Good morning, Your Money fans and, by the looks of it, you had a great St. Patrick's Day. At least I hope you downed a couple pints of green beer yesterday. Otherwise, you need to see a dentist pronto.
Of course, there a lots of worse aspects to a hangover than discolored dental work, such as waking up to your freshly inked signature on a marriage certificate with someone named, "Trixie." But even if you didn't touch so much as a wee drop of the luck of the Irish, you can still have a head throbbing from other excessive indulgence, such as wracking up a pile of credit card debt, and not just to cover a six-figure bar tab and the Elvis impersonator who joined you and Trixie in wedded bliss.
What's the best way to $0?
The best strategy to retire your debt is to stop adding to your balance, then set a flat, consistent payment each month to methodically winnow down your debt. The difference between just making the minimum payment and setting a flat monthly amount is striking. If you have $10,000 of debt on three cards at varying interest rates, paying the minimum takes more than 11 years and $5,000 of interest to retire your balance. But take 4 percent of your original debt — $400 a month — and pay that amount consistently and you'll be done in less than three years and pay less than $2,400 in interest.
If you've got more to spend on your debt, there's a big debate among personal finance experts about whether you should throw that money at your most expensive debt — charging the highest rate of interest — or at your smallest balance. The high-rate camp argues that their approach cuts your total interest expense the most. Small-balance advocates say that it's more important to get the satisfaction and reinforcement that comes from getting at least one account to a $0 balance as soon as possible.
Until debt do you part
I say, choose whichever one feels right and that you can sustain until you get to $0. If that's the small-balance approach, don't worry — you're not missing a lot in extra savings.
Take three credit cards: One charging 18.9 percent on a $5,000 balance; another at 15.9 percent on a $3,000 balance; and the third with a rate of 11.9 percent on $2,000. If you could add $50 to one of your monthly payments, where should it go? You'd think the savings would be most significant on the highest-rate card, right?
Right — but only by $74.11. Paying by either method speeds up the payment time at the same rate — six months — so the highest-rate approach doesn't save any time, just a little money.
So set a strategy to pay off your debt, stick to it, and stop adding new charges — even if Trixie insists on Niagara Falls for the honeymoon.