Paying Every Debt Equally
When you have multiple debts to pay off (a credit card here, a student loan there) you might feel like a rock star simply for keeping up with them all and dividing your attention in a lot of different directions. Which, in a sense, you are! After all, you should always pay at least the minimums on all your loans.
But, if you have extra money to pay down your debts, you’re doing yourself a disservice by dividing it equally. The debts with the highest interest rates grow the fastest, so you should focus your muscle on the most toxic debts first.
A hypothetical example: You have $5,000 debt spread over three credit cards ($15,000 total) and the cards have interest rates of 15%, 20% and 25%, with a minimum payment of $100 on each. You have $600 to put toward all your credit card debt ($300 for your minimums and $300 extra). If you put the extra $300 toward the cards with the highest interest rates first, you’d get out of debt nine months faster than if you split it up equally between the cards—and you’d pay over $1,300 less in interest in total! The amount you put toward your debt is the same, but simply allocating it differently makes a huge difference.