Do you have a lot of debt? If so, you are like many Americans who live with anywhere from a little debt to others who have massive amounts of debt. But not all debt is created equally and depending on your situation and goals paying off the debts may be a little different for each of you. Most people consider credit card debt as the worst as it generally has the highest interest rates. While that may be true, you could have a different priority that needs to be addressed before the credit card issue. You need to take a long hard honest look at your debt and the situation you are in before deciding what debt is your priority.
The worst debt is only part of this equation indeed. Other factors include what if the debt is helping you establish credit or enhance your credit score. What are your overall goals when it comes to managing your debts? How is your financial situation overall, including any possible taxes that you may owe in addition to traditional debts you have incurred. So do not rush to judgment and just assume that your credit card debt is the worst debt and therefore needs to be paid off first. After you consider the following, you will be in a better position to decide what debt you should and need to pay off first.
You first need to ask yourself what is the worst debt I currently have. After that, you have determined that you can create a debt repayment plan for that debt as well as your others. Yes, credit card debt is normally some of the worst debt you can have due to the high-interest rates, but that does not mean it is your worst debt regarding when it should be repaid. According to the National Debt Relief, there are five major kinds of debt that you will encounter. They are credit cards, student loans, mortgage, tax and automobile debts. Depending on your situation will dictate what kind of these debts would be considered your worst debt.
To be honest regardless of the type of debt the worst you can have is the one that you cannot pay or pay on time. That is because late or missed payments can cause you to have a negative effect on your credit score. If you fail to make payments that can not only cause your credit score to go down but can trigger some other negative consequences such as an increase in the interest rates of other debts and the lower of credit limits on revolving debts such as credit cards. These things can lead you to have the need to borrow even more money over the long haul and can add years to your repayment plans. An example of when credit card debt can be delayed is if you are having trouble making your car payments. If you miss those, your car can be repossessed, and you could lose your job if you cannot get there. The same can be said of your mortgage, if you get behind on those payments, you could potentially lose your house, and that is not a good situation to be in either. Ideally, pay the minimum of all your debts but prioritize the ones that you absolutely cannot miss and pay those first.
Second you will want to consider your credit score when deciding what debt to pay off and when. By failing to pay your debts on time and racking up more credit card debt, you will have a negative impact on your credit score. And by harming your credit score you hinder your chances at better loan rates and terms and the ability to purchase a home or automobile. Let us face it; your credit score is a window into your ability to repay not only the loans and debts you have currently but any future loans you may get. If you are looking to get new loans it is an important thing to do with regards to keeping a high credit score or improving one that may not be so good now. A higher score means you will be more likely to get better terms and a loan in general.
If you have no idea what your score is or what is on your credit I suggest you go to http://www.annualcreditreport.com to get a free copy of one of the three credit reports made available to you on an annual basis. The best practice is to get one every four months to monitor your report throughout the entire year and not just with all three at once. If you have missed several payments in the past, you will need to repair your credit, and you do that by paying all your debts promptly. Then you can start by not using new credit to pay for expenses, and that will enable you to start reducing your debt limits. The less you owe and the more credit you have available the higher your score will be. At this point, you can start to prioritize your debts and decide what ones to pay off first. Most people like to start with the debt with the highest interest rates and pay those off first to avoid unnecessary interest charges. Others prefer to start with a smaller debt to get it paid off and establish a starting point and build self-confidence. Either way is fine the key is to start and develop a plan to tackle your debts.
Third you need to consider your short and long term goals when paying off debts. If you are like me, you may have large student loans to repay. But if you are like me you may not be in a rush to repay these as the interest rates are generally low, and they may have some tax advantages if your income is at certain levels. But if your goal is to be debt-free by a certain point in the future you should consider not incurring any additional debts and pay off the debts with the highest interest rates first to help avoid incurring any further debt.
But let us say you do not want to have an auto loan looming over your head as that is a loan that is not tax deductible and is also for an asset that will depreciate at an alarming rate. In that case, you will want to pay that loan off first then move on to the next on your list. Before you make a financial plan to repay your debts you need to first prioritize your personal goals, then you can begin to pay off the debts you deem most important first then move on to the next after it is paid off.
Finally, you need to remember your finances in general terms. No matter what you decide you can only pay what you can afford so you need to have a budget, so you know where your money is going. Only then can you cut costs and start reducing your debts. And that may mean you need to find additional sources of income to pay even the minimum amounts of your debts. Try whatever means you have available to you to reduce your payments to a level that you can afford. If you have a credit card with a high-interest rate, call the issuing company and ask them to lower the interest rate to something that is more manageable. Most companies will work with you if you have a good history of payments, and you explain that you are in financial trouble. By lowering the interest rate they increase the likelihood you will be able to repay the debt. And the worst thing they can do for your asking is saying no.
If you need additional information on this subject or any other financial issues, feel free to contact me directly. Also, feel free to leave a comment on this post and start a discussion that could help other readers.
