You’re Paying Off Debt Wrong

Six ways to get back into the black faster

  • By Quentin Fottrell, Marketwatch
  • August 25, 2014

you’re paying of debt wrong

As the economy slowly improves, Americans are racking up more debt. “American consumers deleveraged after the financial crisis, but they’re starting to take on more debt again,” says Ben Woolsey, president of credit-card advice website And experts say they often make big mistakes when trying to shed that debt and get back into the black. 

Total outstanding revolving credit card debt reached $873.1 billion at the end of June 2014, according to the latest data from the Federal Reserve, up from $861.5 billion in the first quarter of 2014. The average American household holds around $15,480 in credit card debt, $156,474 in mortgage debt and $33,424 in student loan debt, according to Federal Reserve and government data crunched by personal finance site All told, Americans owe around $11.74 trillion in debt, up 5 percent from last year.

People who are mired in debt often make rookie mistakes, especially as many panic, says Kathryn Davis, president and CEO of BALANCE, a subsidiary of the non-profit Consumer Credit Counseling Service of San Francisco. Some no-nos: Taking out a payday loan or title loans; transferring a balance to a new zero-interest credit card, but failing to pay off the balance when the higher interest rate kicks in; and borrowing from a 401(k) retirement account, especially if it involves paying a penalty. Putting creditors on rotation — paying one creditor while failing to make payments on other debt — is another bad idea: After six months, no one will be happy.

“When people sense that they’re in a financial squeeze, they start putting Band-Aids on the problem,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. Debt settlement and bankruptcy should only be considered when you’ve run out of all other options, she adds.

Here are six smarter (and faster) ways to pay off debt:

Prioritize Payoffs Based on Interest Rates
For many consumers, it makes sense to concentrate on paying off the credit card with the highest interest rate first, while making smaller or even just required minimum payments on their other debt accounts, says Lindsay Konsko, consumer credit specialist at 

Do the math to see how much will be ultimately paid on each card with interest. “Most people will save paying off the highest interest rate first,” she says, though “it’s a judgment call on the consumer’s part.” (This couple cleared $125,000 in debt over four years; they decided to pay off the lowest dollar amount on each credit card first because it gave them a greater sense of achievement.)

Treat Your Debt Plan Like a Diet Plan
“Paying off debt is like getting in shape and losing weight,” says Ben Barzideh, financial adviser at Piershale Financial Group in Crystal Lake, Ill. Both require discipline and little treats along the way, and both should target the one area that bothers you the most. “Make a to-do list, track your monthly inflows and outflows just like calories,” Barzideh says. 

And Konsko recommends little rewards when you reach debt milestones, like a $10 manicure or book when you pay off $1,000 in debt. As with a diet, make sure your debt repayment plan is not unrealistic. There’s no point in giving up halfway through and going on another spending splurge. “People who want to lose weight say, ‘I’ll never eat another chocolate cake,’ but they can usually do it for [only] a short amount of time,” says Lynnette Khalfani Cox, author of “Zero Debt: The Ultimate Guide to Financial Freedom.”

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