3 Reasons You Should Pay Off Lower Debts First

When you are in over your head in debt, it may be a good idea to pay off lower debts first to start getting back above water. Many people feel trapped by the amount of debt they have accumulated. Instead of panicking, developing a smart tactic to begin paying off your debt will help you both recover financially and learn more fiscal responsibility for the future. Starting with your lower debts, like your credit cards, will help you prepare for the discipline it will take to pay off larger debts, like a mortgage. 

#1 Close Credit Lines

A primary benefit to paying off your lower debts first is to actually close some of your credit lines. It may take five years or more to pay off very large debts on cars, homes or businesses. Instead of maintaining multiple open credit lines while you attempt to do this, you can start to streamline your debt by effectively closing the small lines. Try to get yourself to only one or two credit cards. Further, attempt to keep the balance on these credit cards below 10%. You can move through the credit lines one at a time, closing each off in order from highest interest rate to lowest interest rate. If you are paying off any loans early, or prepaying, you can expect prepayment penalties. Try to avoid these penalties by setting a schedule to pay the loans off on schedule.

#2 Repair Credit Score

Closing credit lines and reducing balances will raise your credit score. For those people with adjustable rate loans, especially on cars or homes, raising your credit score will make a number of your loans much cheaper. Further, if you do decide to take out a debt settlement loan or a refinancing loan, you will have a better credit score to get lower interest rates on your new loan. Making regular payments will certainly raise your score, and closing lines entirely will raise your score even further. Again, if you can do this on schedule, you will see the biggest rewards in your credit score. Prepaying can backfire as the lender will report this as a negative mark against your credit. 

#3 Prepare for Loan Modification

Loan modification refers to any practice of changing a loan contract including refinancing, settlement or consolidation. Typically, you should only modify a large loan. This is where you will see the greatest rewards. Because many loan modification procedures involve bundling up your loans, you do not want to carry your small, low rate loans along with your bigger, more expensive loans. When you are preparing for some type of loan modification, it is best to get the small loans off of your financial record. This way you can focus on the highest priority loans to take with you through the modification process. Again, once you have paid off the smaller loans, your credit score will increase. This better score will help you in the modification process as you take out a refinancing or settlement loan. 

 


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