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NEW YORK (
TheStreet) -- OK, so you overspent for the holidays. Join the club. The bill is in the mail.
If you can pay off the balance on that credit card in full and incur no interest charges, you are in the clear. But if that bill is joining a few other cards with balances, you will need a pay-down strategy.
Everyone struggles to get out of debt at one time or another in their life. Unfortunately, without a clearly defined plan you can actually stick to, credit card balances never seems to shrink despite your efforts. To make a dent in your debt, do some number crunching -- and even some soul searching -- to see which of these payoff plans is right for you.
The snowball method
One way is the snowball method, which has nothing to do with the weather. The idea is to take baby steps, paying the lowest balances first to get some momentum and motivation. By focusing all of your extra money toward your lowest balance and paying just the minimum on your other accounts, you can hopefully pay at least one balance off in a short time. Then you can parlay the amount you were paying on that account onto the next lowest balance.
Pros: The feeling of accomplishment is similar to the one you get from checking tasks off of a "to-do" list. Paying off a small balance gives you a boost and can encourage you to continue working toward a debt-free life.
Cons: Paying off your lowest balances first likely won't help your credit score. Here's why: If improving your credit score is important to you, it's in your best interest to work on reducing the balance owed on the card that has the higher debt utilization. For example, if you owe $500 on a card with a $2,000 limit (25% of your available credit), and you have another card with $4,000 balance and a $5,000 limit (which is 80% of your credit limit on that card), the wiser move to improve your credit rating would be to reduce your debt-to-credit ratio on the latter.
Is it right for you? If you thrive on breaking down challenges into smaller tasks, the snowball method could be effective in helping you inch toward your ultimate goal.
Highest interest first
A more traditional school of thought is to pay your highest interest account first, regardless of balance. This approach is strictly about the math. It means tackling the account that's costing you the most to carry a balance.
Pros: You can't argue with numbers. If one card has a 15.99% interest rate while another has a 9.99% rate, aiming your payments toward the higher-rate account will save you money in the long run. As your principal goes down, your monthly interest payment will too, and eventually you'll start to see some progress.
Cons: Depending on how high the interest rate and balance are, it could feel like an uphill battle. Just paying the minimum definitely won't cut it. Be prepared to make sacrifices so you can put a substantial amount of money toward this bill each month.
Is it right for you? If you don't mind sitting down with a calculator and following a budget plan to the letter, putting your energies toward your highest-interest account first makes sense. But make no mistake: It will take discipline to keep your game plan going.
No matter which method works for you, the key is to find a way to pay as much as you can each month. You definitely need to make more than the minimum payment -- and not add to the balance with new purchases. (So put that plastic away. If you get unexpected money such as casino winnings or expected ones such as tax returns, put them toward those outstanding balances.) Remember: Stick to your plan, keep your eye on the prize and watch those balances disappear.
Roman Shteyn is co-founder of Credit-land.com. He writes frequently on personal finance and credit-related topics.