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Two Strategies to Pay Down Debt—Which One Is Best for You?

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Which should you tackle first to pay down debt—the loans with the highest interest rates or the lowest balances? You will find financial experts on both sides of the fence on this, but it really comes down to what motivates you and keeps you on track.

Strategy 1: Pay down debt with the highest interest rates.
This sounds like a no-brainer. While maintaining minimum payments on all loans, you would want to choose the loan with the highest interest rate to pay down more quickly. This is because it is costing you the most money every day as the interest accrues on the balance of your loan. This is only common sense, right? But it can get discouraging as the balance appears to shrink at a snail’s pace because more of your monthly payment is going towards interest in comparison to the loans with lower rates. So, let’s take a look at Strategy 2…

Strategy 2: Pay down debt with the smallest balances.
The problem with the first strategy is that it can get discouraging as the debt continues to loom huge above your head, and your monthly payment doesn’t seem to make much of a dent. So, while the first strategy makes sense financially, it just might not work for you long-term as your enthusiasm lessens. If you find yourself discouraged, it might be a better strategy to pay down debt with the smaller balances, no matter what the interest rate. As you pay off each loan and move on to pay down the next, you will gain momentum and a sense of achievement—this is called the “snowball” effect! By the time you are ready to tackle the loan with the largest balance, you will have gained the confidence you need to stay on track until you are debt-free.

In the end, it is up to you how you want to approach paying off your debt. As long as you choose a strategy that suits your needs, you are on the road to debt-free success! To learn more about how to manage your debt, visit VSECU’s free online program, Debt in Focus, in our Financial Education section on our site.