Creating a debt repayment plan in conjuction with budgeting

paydowndebtAfter you’ve sat down and started budgeting, hopefully you have money left over at the end of the month to start knocking down some of the debt you’ve built up over time. If you are still only able to pay the minimum balances, you’ve not cut enough spending. Revise your budget and exclude any frivolous spending. Focus in on areas like groceries, entertainment, and see if you can do better. Now, let’s assume you have cut back further, and you have $200 left over (after meeting minimum due on credit card payments) after all of your bills are paid. Let’s assume you’re smart and wanting to focus on creating a sustainable debt repayment plan on your own (maybe a debt consolidation loan is not possible for you – if it is take advantage of it)…Where do you start? How do you choose which card to payback first? Or should you put money towards all of them equally or some sort of combination? It makes a difference which way you choose to do things. Pay down the wrong card first, you could end up paying more in total than you would have had to. In general, you should pay down the highest interest rate cards first. But before you assume the interest rates for each card are locked, you should certainly give each credit card company a call to see if they can reduce the rate for you. More times than not, credit card companies are willing to work with you. Now, store cards like Kohl’s or Macy’s probably won’t lower your interest rates, but it’s still worth the call. Moreover, you should consider looking at transferring balances to cards offering better rates.

On a side note, some people may argue to payoff your smallest balances first. The truth is, this only makes sense if the interest rates are higher on these cards. It will hurt you if you decide to payoff the low balance cards first if their rates are lower.

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