Which Debt Should I Pay off First?
When you’re trying to pay off your debt, the first step that you have to do is prioritize your loans. Simply throwing extra money at random loans might make you feel better, but you won’t see much progress. In order to really get your debt paid off, you have to have a plan that includes a list of which debts you’ll pay off first. But how can you decide?
Steps to Paying off Debt
To start, make a budget that includes the minimum payment due on each loan you currently owe. Use this budget to determine how much extra money you can devote each month to paying off your debt.
Then, make a list of all the debts along with their interest rate and the total amount owed. Ideally, make the list on a computer so that it can be easily updated or changed easily as you pay things off. Looking at the list, determine if there are any debts that can be paid off entirely with the “extra” money you have to devote to paying off debt. If there are any, pay them off immediately. If there is more than one debt like this, pay off the one with the highest interest rate first. By paying off these small loan, you’ll simplify your bookkeeping and make sure that you work to eliminate the problem of missed payments. Paying off loans can also help a person to feel like they’re making real progress on paying off the debt.
If you cannot pay off any of the debts completely, take all of the “extra” money and include it along with the minimum payment on the loan with the highest interest rate. This will ensure that as little interest as possible is accumulating on the debt.
As bills come in during the month after you do this, mark the new amounts owed (as well as any change in interest rates) on your debt list. Adjust your budget to reflect any changes in the minimum payment due. Then, repeat the process of determining how much extra money you can devote to debt repayment, checking to see if there are any loans you can eliminate completely, then making one large payment on the loan with the highest interest rate.
If you need help coming up with a plan, contact a debt counselor. These professionals are experts at coming up with a plan to pay off debts.