What to Pay First

by FaithLife Financial

July 2010

What to Pay First

Some people may find their debt situation so overwhelming they retain a credit counselor to handle things for them. Most of us can deal with the situation through a mix of planning and determination. To strengthen our determination we can turn to Proverbs 21:5 – “The plans of the diligent lead to profit.”

We should start by reducing the number of credit cards in our wallet, and focusing on the smallest debt with the highest interest rate. We really need only one credit card, and it should have a minimum (or no) annual fee and low interest rates. This means shopping around instead of choosing whatever is being offered. 

Selecting the smallest debt to pay first will eliminate it sooner. Watching a debt vanish from our stack of monthly bills encourages us to keep going until the debts are under control.

The Magic of Snowballing

With no new credit charges (and only one credit card, used sparingly) we should assign a fixed amount to pay against the credit card debt each month. In this manner, the power of our payments will create a snowball effect. Here’s how:

If our credit card balance is $2000, the annual prorated interest is 18 percent (1.5 percent monthly), and we pay $200 each month against the balance. Each time we reduce the balance, we lower the monthly interest charged against us. By paying the same amount month after month more money is applied to the balance and less is lost to interest.

Payment looks like this: Debt before payment:    $2000 Monthly interest: $ 30 Payment:     $ 200 New debt balance:    $1830 After eight payments:   Debt before payment: $ 560 Monthly interest: $ 8.40 Payment:     $ 200 New debt balance:    $ 368.40

Once this debt is paid off, we add the $200 to monthly payments on the next largest debt, reducing it even faster. Working our way in this manner through our debts is like a snowball racing downhill – it gains momentum and the impact is larger.

Let Patience Have Her Perfect Work (James 1:4)

Accumulating heavy debt may have taken years, so expecting to eliminate it in weeks or even months is not realistic. That’s why we should start by targeting one debt to be eliminated within a fixed period and assigning a regular payment amount to achieve our goal. 

Remember that this takes time and we only succeed when we exercise patience, focus on our destination and keep moving toward it.

Build the Snowball With “Found” Money

Those of us with debts we cannot afford usually have possessions we do not need. Some of their purchases may be responsible for the same debt we are trying to eliminate! To hasten debt reduction we can convert these unused possessions into “found” money.

Consider selling unneeded furniture, appliances, sports equipment and other items in a garage sale, applying the proceeds directly to the debt. Think about selling an automobile (Do we really need a second car?). After their mortgage payments, automobiles represent the largest single expense for most people.

If the garage sale nets $1000 which is applied directly to a credit card charging 18 percent interest, this move saves us $180 each year. If we were planning to pay off a $5000 credit card balance over five years, the $1000 lump sum payment would reduce the time to less than four years, saving almost $700 in interest. Every person’s financial situation is unique.

If you need help deciding what is best for you, one of our FaithLife Financial Representatives would be happy to talk with you. Contact us at 1-800-563-6237 to find a Representative near you, or visit our website at www.faithlifefinancial.ca for more financial tips and tools.

---

FaithLife Financial also recommends the following video produced by 100 Huntley Street with reporter, Bridget Antwi.  Please note that you will be leaving Women Alive's website when you click the link: http://www.youtube.com/watch?v=JZ6mvx