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Approaches to Debt Reduction

Approaches to Debt Reduction

AUBURN UNIVERSITY, Ala. – While the current economy has admittedly affected people differently, one common theme has been that getting out of debt is now cool.

At one time, late night television junkies were the only ones exposed to get-out-of-debt, late night television ads,  but now debt elimination ads target everyone  — debt negotiation, foreclosure relief, debt settlement, bankruptcy relief, credit repair — the list goes on and on.

Alabama Extension Human Sciences agent Theresa Jones offers some debt reduction strategies that you can put to practice quickly, easily and on your own.

Ways to Reduce Debt

Ultimately, most efforts aimed at eliminating debt can be summed up in two primary goals: (1) time (getting out of debt as quickly as possible); and (2) saving money (paying as little in interest as possible). While there are numerous ways to work on these goals, here are some simple steps that will provide dramatic results.

Level Payments

Think of this as the anti-credit card payment. Credit card companies allow you to reduce your required payment as your balance decreases. By making a level payment, you pay your current monthly payment steadily until the debt is paid off.

If you have a balance of $4,633.70 with a 21.24 percent interest rate and make the minimum payment of $125.00 , it would take 19 years to pay this debt. You will have paid more than $11,873 in interest.  This is an example of paying only the minimum payments.

Power Payments

PowerPay, is a systematic way of repaying debts. It was developed more than 15 years ago by Utah State University Extension. This system of debt reduction is referred to as a snowball method of repaying debt. To use this method, you make level payments on all debts and accumulate no new debts. As one debt is paid off, that money is rolled over to a new debt until all is paid in full.

Deciding how to apply the extra payments as debts are paid off is a benefit of this program. Should you pay the highest interest rate to save the most money? Or should you pay off the lowest balance, which may enable you to stick with your debt reduction plan better? The Power Pay program will give you each scenario, and you can choose the method that works best for you.

The time and money saved using this system of repayment is often breathtaking. Utah State has made their PowerPay calculator available for free on their Web site at https://powerpay.org.

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