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credit and debt

maths is easy

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There have been lots of takes on the whole ‘debt snowball’ versus ‘highest debt first’ payoff routes for debts - particularly consumer debts. In each case, the maths is easy. Paying off the highest interest debts first will save money.

There are also discussions on whether people in debt should do some balance transfers to get there debt at a lower rate. Again the maths is easy. You will save money if you move your high interest debt to low interest debt and still make the same payments.

As many people point out, though, what is difficult is the psychology. And that means knowing yourself.

For people who have been chronically overspending on credit cards, then the best option is probably not to balance transfer and to pay down the smallest debt amount first as this programme is easier to stick to. Especially if they have a very high level of total debt, but one of the accounts is relatively small.

For people whose total debt is relatively low (i.e. can be paid off in a year or less) or who have similar sized balances on all their credit cards, they could probably go with the highest interest debt first. The psychological impact of the debt snowball will not be as great so they could save money.

Finally, for people who genuinely had a one-off incident that has caused their debt (very rare I reckon) or who have all their debt on a single account then they might be able to manage their finances as well with a balance transfer - saving them money. The sorts of incidents that I think will fit into this category are things like being under-insured on a holiday to the States and having some kind of medical emergency.

Of course its possible for someone with any debt problem to succeed using any of these strategies, but getting the psychology right makes sticking to the plan that much easier.

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