Part of knowing how to save money is to be just as wise when it comes to paying your debts, more specifically knowing how to maximize your ability to pay them off completely.
And in the right order.
You have to consider plenty of factors when you start talking debt and prioritizing how you want to start paying toward it.
For starters, you have to ask yourself the question: which debt is the one with the highest interest rate? The other question that looms equally large: which debt is the highest in relationship to the total amount available on the card, also referred to as a debt ceiling?
There are two general schools of thought that are equally potent at putting debt to the mat. The first is starting with the smallest amount of debt you have and working your way toward the highest loan you’re currently dealing with at the moment. For the purposes of discussion, let’s remove home, car and school loans from this given that they’re secured and can be tied back to something and would be either considered necessities (home, car) or extremely low rates (school).
This way of paying off the lowest and working your way toward the highest gives you that sense of accomplishment as one line of credit is paid off after another, and thus gives you that amount of money to then reallocate once that initial debt is paid. If you owe a retailer $100 per month, and the debt is settled on a $2,000 credit card, you can take that $100 and then begin to put it toward another credit card you might have. The trick is not assuming that the $100 per month you’re now saving is found money; it belongs somewhere else in your budget to help with more bills that you owe.
While that process is the feel good credit and debt story of the year, you might want to prioritize with the highest interest rate and debt to credit ceiling ones first and foremost. This focuses on credit that is butting up against the total amount of credit you have (i.e. you owe $4,000 on a card that has $4,000 limit); that might be more of a credit score alert then the aforementioned method of low to high balances paid.
No matter how you choose to prioritize you have to take into account your balances, your interest rates and being able to most importantly make your payments on time. None of these ideas is worth anything if you aren’t paying timely.
But not instituting some sort of credit and payment system is by far the worst, since you’ll do nothing but pay and never really get ahead.
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