Attacking Debt: 2 Powerful Ways That You Can Start Today

fistful of credit card bills

If you're juggling a fistful of credit card bills, you're probably contemplating a variety of ways to eliminate your debt. Before you opt for debt consolidation, debt settlement, a debt management plan or bankruptcy, you can also attempt to repay your debt on your own terms.

Personal finance gurus Dave Ramsey and Suze Orman have competing ways of attacking credit card debt, but both are variations of the "snowball" plan in which you pay off one debt in full then take the money you were paying on that bill to make larger payments on your next debt until they can all be stamped "paid-in-full." The concept is that if you concentrate on one debt your efforts to pay it off will be more worthwhile than trying to pay off small amounts of debt on various credit cards.

Both plans require you to create a budget and develop the discipline to stick to your plan. You need to immediately stop using credit to pay for anything.

If you think that's too difficult for you, you may want to consult a non-profit credit counselor who can put you on a debt management plan. You can find one in your area through the National Foundation of Credit Counseling (NFCC).

If you're ready for the challenge of creating your own debt repayment plan, consider these two options:

Lowest Balance

Dave Ramseys debt snowball plan

Dave Ramsey's snowball plan recommends that you pay only the minimum payment on all of your credit card debt except for one. He suggests that you list all your debts in order starting with the smallest balance first. In other words, like this:

$2,200 to Capital One / minimum payment: $61 / interest rate: 21%

$4,400 to Discover / minimum payment: $99 / interest rate: 15%

$5,600 to Bank of America / minimum payment: $159 / interest rate: 22%

Then, you tackle the smallest balance first.

If you have $700 in your budget to devote to credit card debt, then you should pay the minimum on the larger balance cards and $442 each month on the Capital One card. It will take six months for that card to be paid in full according to a credit card calculator.

At that time, your Discover Card balance will be $4,101. You'll have $541 per month to pay on that balance, which you can pay off in nine months. Once that credit card debt is repaid, you can then devote $700 per month to eliminate that Bank of America debt, which will be $4,816 after 15 months of minimum payments. It will take you 8 months to repay that balance, meaning you will be debt free in 23 months and you will have paid a total of $2,744 in interest during that time.

Ramsey's concept is based on the fact that personal finance is "80% behavior." He believes the psychological boost of paying off one bill in full will boost your enthusiasm for becoming debt free.

Highest Interest

Suze Ormans debt snowball plan

Suze Orman's debt plan, while similar to Ramsey's in that you tackle one debt at a time, recommends beginning by paying off the debt with the highest interest rate. This will reduce the amount of interest you'll pay since the debt with the highest rate will be paid off first.

In the above case, the debt would be ranked like this:

$5,600 to Bank of America / minimum payment: $159/ interest rate: 22%

$2,200 to Capital One / minimum payment: $61 / interest rate: 21%

$4,400 to Discover / minimum payment: $99 / interest rate: 15%

You would start by paying $540 per month to Bank of America. It would take you 12 months to pay off that credit card balance, at which point you can tackle the remaining balance on your Capital One card of $1,950. You can pay $601 per month on that credit card and pay off the balance in four months. Your remaining balance on your Discover card after 16 months of minimum payments will be $3,746. You can pay that off in six months by paying $700 per month and will be debt free in a total of 22 months.

In other words, both methods will help you reach your goal in less than two years. However, if you add up the amount of interest you'll pay on your debt using each method, you'll save $589 in interest payments by choosing to pay off your higher interest debt first. The question is whether you'll find it easier to stick to your plan by paying off the lowest balance first. It's up to you to decide whether cash or psychology will work best for you.