March 16, 2007, Newsletter Issue #56: About "Smallest First" Payment Plans

Tip of the Week

Trying to figure out how to pay bills? A smallest first debt payment plan is one in which you pay bills off according to their size. Let's say you have a JC Penney bill for $300 with a minimum payment of $26, a $575 Old Navy bill with a minimum payment of $40, a $1,500 Visa bill with a minimum payment of $54, and a $10,000 student loan with a monthly payment of $200. In a smallest first debt payment plan, once you pay off the JC Penney bill, you then take that money and add it to the amount you pay toward the Old Navy bill each month. Clear Old Navy, and add the total you were paying on Old Navy and JC Penney to your Visa bill, and so on.

Paying off the smallest bills first is emotionally gratifying for many people, and the snowball effect of rolling the payments into the next bill's payment pays the debt off more quickly. However, if a smallest first debt payment plan, while emotionally gratifying, is not the most cost effective way to pay off debt. If you want to save money on interest, you should use a push payment plan.

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