PowerPay Your Way Out of Debt

Money 2000 and Beyond When is the best time to catch a growing debt burden? Before it gets out of hand. You can generally spot a debt problem early on with indicators, such as calls and letters from creditors, "juggling" bills and credit card payments, making only minimum monthly payments, taking out a new loan to repay existing debts, and increasing credit card balances.

Is the number of bills you owe and/or the outstanding balance on your debts increasing each month? This could signal an increasing reliance on the use of credit. If you cut back on credit buying now, you will be ahead of the game.

Are you consistently paying only the minimum due each month on your credit cards and debts? This, too, can be a critical indicator. When you pay only the minimum amount each month, you are paying high finance charges on the unpaid balance.

How do you deal with a mounting debt problem? There are several ways, including contacting creditors to seek relief, debt consolidation, and working with a non-profit credit counseling agency. Making "power payments" is another method to systematically put you on the path to being debt free.

What are power payments? A power payment means that, as soon as one debt is totally repaid, the monthly payment from that account (e.g., $25 for Sears) is applied to another debt. Money from paid accounts continues to be combined to pay off other debts at progressively accelerated rates until eventually all debts are paid. The result can be hundreds, even thousands, of dollars saved on interest payments and months or years earlier repayment at no additional monthly cost.

Rutgers Cooperative Extension uses Utah State University Extension's PowerPay© computer software program to help New Jersey residents save time and money on debt repayment. It is most helpful to people who are able to meet the minimum monthly payments on all debts. It is even more helpful to debtors who have a little extra each month to devote to debt repayment or those who use windfalls, like tax refunds, for debt repayment.

PowerPay© first calculates what the repayment time and interest costs will be if you continue to make payments at current levels. It is often shocking for consumers to see the interest costs and the length of time it takes to repay debts, especially if they are making only the minimum required payments. Sometimes it can take decades.

Next, PowerPay© calculates the possible savings by using power payments in three different sequences: (1) paying off creditors with the highest interest rate first, (2) paying off creditors with the lowest balance first, or (3) paying off creditors with the shortest term first.

PowerPay© can also accommodate customized repayment plans such as paying off a relative first or adding an optional monthly payment when extra funds become available. All of this information is available on printouts and an analysis can include as many as 30 creditors. Persons who request a calculation receive a customized calendar that shows how much to pay each creditor until all balances are at zero.

To receive a PowerPay© analysis, you need to make a list of all your debts with the total owed, the interest or annual percentage rate (APR), and the monthly payment amount for each. You can obtain an analysis by obtaining a PowerPay© worksheet on the Rutgers Cooperative Extension Money2000 Web site: www.rce.rutgers.edu/money2000.

  1. Rutgers
  2. Executive Dean of Agriculture and Natural Resources
  3. School of Environmental and Biological Sciences