Tackling Debt: What should you pay off first?
So you want to be debt free?
Deciding which debts to payoff first can seem confusing, but if it’s on your mind to tackle it once and for all, take the first step by locating ALL of your debt.
- Write it down, or make a spreadsheet. Be sure to print your credit report for any older debts you may have neglected or forgot about.
- Identify which of your debts are ‘good’ and ‘bad.’ And YES there is such a thing as good debt! Things like a mortgage, investments, and educational loans are considered ‘good debt.’ Bad debt is usually auto loans, credit cards, etc… These kinds of debts don’t have much equity and don’t generate any income.
- Continue making regular monthly payments on the good debt. There shouldn’t be any rush to eliminate good debt – especially not before bad debt has been eliminated.
- Group the bad debt, and try eliminating some of it. Consolidate loans, if possible. Student loans, or multiple lines of credit with one financial institution are sometimes easier to consolidate. Consider zero-interest rate balance transfers with credit cards. Taking this step won’t reduce the amount of debt you owe, but it will lower the lines of credit you have, and eliminate making separate monthly payments to different lines of credit.
- After consolidating and reducing (if possible), order your debts by balance, starting from low to high. There are different methods you can use when it comes to ordering your debts. You may want to order them by balance, interest rate, or how close you are to the credit limit. Whichever method you choose, prioritize the ones you want to pay off first.
- Once you’ve prioritized them, budget monthly minimum payments for each into your budget schedule. When your budget allows for more than the minimum payment, be sure to put the extra funds towards the first debt on your list. Doing this will allow you to reach the payoff point sooner. Once you pay off a debt in full, apply that monthly payment amount to the next debt on the list.
If you’re paying over hundreds of dollars in interest each month, it may be a good idea to prioritize the account with the highest interest rate to save yourself money in the long run.
Cut back on unnecessary expenses (like that daily trip to Starbucks or the weekly manicures) and put the extra money towards paying off debt!
The repayment process will take time and patience but it will increase your credit score. Making payments over time and on time as scheduled shows good financial stability, increasing your credit score in the long run. Keep credit card to a minimum while repaying debt.
Whichever method or order you choose, the key is to stick with your plan and not neglect your existing monthly budget. It’s a good idea to track your progress so you can see the light at the end of the tunnel, it can also help you stay motivated to stick to the plan. Paying off debt is tough, but it is definitely worth it!