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Step 5: Which Credit Cards Do I Pay Off First?
The Debt Ditch Recommendation For Effective Debt and Financial Management Planning

So far we have shown you two methods of debt and financial management planning.
These two monthly payment formulas will help you effectively eliminate credit card debt by helping you determine which cards to pay off first.

We have another creative payment solution to offer.

This method of determining which credit cards to pay off first combines the previous two, and we think it provides you with the best debt and financial management planning.

You have already listed out each of your credit cards, the balance owing on each, minimum payment due, months to total payout (MTP) and interest rate charged on each card. (If you have not completed this important step look here. It won't take more than a few minutes to do and is an essential part of good debt and financial management planning.)

In the first monthly payment formula, it is recommended that you pay off the card with the highest interest rate first. In the second of our creative payment formulas, experts recommend paying off the cards that can be paid off most quickly regardless of the interest rate charged. Here is our recommendation.

Monthly Payment Formula 3 -
The Debt Ditch Combo Method For Effective Debt and Financial Management Planning.

As in Monthly Payment Formula 2, order your list of credit cards by how quickly they get paid off. That is, put the lowest MTP (months to pay out) card at the top, followed by the second lowest etc.

Here is where the Debt Ditch Solution differs: Once you have all of your cards in order by lowest months to pay out (MTP), have a look at your list. If you have two cards that will be paid out at around the same time, that is they have the same or similar MTP number, look at the interest rates on those cards. If one card has a significantly higher interest rate, pay that one off first, even if the MTP is slightly higher than the other card.

Here is an example:

You have two credit cards. One has a balance of $1000 and a minimum monthly payment of $100 per month, which gives it an MTP of 10. That card has an interest rate of 9.9%. The next card has a balance of $1300 and a minimum monthly payment of $115 per month, which gives it an MTP of 11.3. That card has an interest rate of 18.9%.

Our recommendation is that when you have two cards with similar MTPs, as in the example above, pay off the card with the highest interest rate first. So in this example, we would pay off the second card, with the slightly longer pay out period first, because the interest rate is so much higher than the first. We think this combination of the two debt and financial management planning recommendations works best.

Make minimum monthly payments on all of your cards except the one you are trying to pay off first. Take the extra money you have found in Step 3 and put that money as an added payment toward your first card.

With this method, you pay off your smaller balance (and smaller MTP) cards first, but you also tackle the high interest rate cards.

Look here for all the steps in our debt financial management planning process: Evaluating Your Personal Spending Guidelines.   


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