April 9th, 2009
Setting Up Priorities For Your Debts
If you are not prioritizing your debt, you may find it difficult to make any headway in paying it off promptly. One of the keys to money management is knowing how and where to spend your money, and taking the time to prioritize your debt has many benefits. First and foremost, if you are managing your money correctly and handling your debts well, your credit score will be generally be higher. Next, you’ll be able to pay off your debts in less time. If you want to get started with your debt prioritization and reduction plan, here is an easy guide to help you on your way.
1. Determine which is more important – high balances or high interest rates (or both).
If you have a credit card that has a very high balance but a low interest rate, this may not be as urgent as a credit card that has a medium balance and a very high interest rate. Take a hard look at the total amount of interest across all your cards as well as your balances. In many cases, the medium balance may actually end up costing you more, especially over the long term. Paying that off first can free up extra money that could be used to tackle the high balance card next.
Conversely, if you have a credit card that has both a very high balance and interest rate, naturally this would be the one that you would want to tackle first.
2. Determine how much you are paying on each card.
If you are struggling to make your payments on one card, but the others are a breeze, paying off that one card quickly is a smart priority to have. Figure out exactly how much you owe, add in what you spend every month on each card and see which cards are dragging you down. By targeting these first, you’ll be able to free up more capital in a few months that can be used to pay off the remaining cards.
3. Loans or credit cards?
If you have a mix of bank loans, credit cards and other forms of credit, you’ll need to decide which one should be targeted first. Typically, traditional loans will have much lower interest rates that credit cards, but there are exceptions to this rule. Take a hard look at just how much money you are paying out every month, and then look at it over the long term as well. If you have a long term loan that will cost you an additional $2000 in interest over several years, paying that off first can be very beneficial.
Once you have your priorities figured out, make a list of what you plan to pay and how quickly you want those debts taken care of. That will help you stay on track and assist you in getting everything paid off in less time. Prioritizing your debts is one of the best ways to easily get a hold of your finances, before they get out of control.
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