NEWPORT NEWS, Va. (WAVY) – Paying down debt can feel overwhelming, even scary at times. You might wonder how to figure out what to pay off first, and what’s the best approach.
WAVY 10 spoke with Belinda Aboagye, a Financial Educator with Bayport Credit Union. She explained what qualifies as debt.
“We can have credit card debt, or basically money that you’ve borrowed to afford a certain lifestyle or make certain purchases or even for an emergency, and you’re paying gradually on it so you don’t have the full lump sum to make a payment on it. That’s debt. So, I could borrow money from a neighbor or a family member and make monthly payments. It’s still debt. It might not have an interest rate, but it’s still money I owe, and I have to pay over a certain amount of time,” said Aboagye.
You might wonder which type of debt you should pay off first.
“I’ll tell you this,” said Aboagye. “There’s two proven methods that work where you focus on either the amount, or you focus on interest rates. So, one thing I want everyone to do is if you have debt, get a clear picture, get an outline of everything that you owe money to. So, what I mean by that is just make four columns on a sheet, or an Excel sheet, where you’re listing who that debt goes to, your monthly payments that you’re required to pay, the total amount of debt you have with them, and then your interest rate you have to pay back for that debt. So, knowing that piece of information for every day would then allow you to prioritize that debt, or rank the debt, according to what’s important to you.
Maybe you have high interest rates and that’s what you want to focus on first. So, you focus on the debts that have the high interest all the way down to the lower interest, or you focus on the debt that has the smallest amount you can knock off quickly, and then basically snowball. It’s known as the snowball effect. It will snowball and eventually get to the big amount of debt, and then make the maximum impact that way. So, it’s really a preferential thing. You know, you go with the snowball method or the avalanche method which focuses on the interest rates, but either one works.”
Aboagye recommends paying off credit card debt first, because credit cards tend to have the highest interest rates. Not paying them off can hurt your credit score.
“If you can consolidate them and get a personal loan, which again, would have a lower interest rate than those credit cards, definitely do that, and then have that one lump sum payment going to pay the most down on that debt that you accumulated.”
Aboagye says you should not use the cards you are working to pay off. Charging more on those cards, because you are successfully paying them off, will continue looping you in to that vicious cycle of debt. She also recommends getting help from a professional.
“I know it’s a very difficult subject to talk about, but there are experts there to help you, and some of them are free of charge. It’s a benefit for people that have memberships of different credit unions. Go and talk to someone. They can help you come up with a personalized plan to help you get out of debt because debt, I believe, has become a very inevitable part of being an American.”
