Pay Off Debt the Smart Way

In order to pay off debt, you must prioritize. It is important to understand how much each account is costing you. Some debt affects your credit score, which can make other things, such as car insurance, more expensive. Some debt carries high interest rates. Having and following a good plan to pay off your debt will save you money in the long run.

The Snowball Method

The snowball method is an effective debt repayment plan. The idea is to pay off the highest interest rate account first. You make the minimum payments on all accounts every month, but you pay additional money--as much as possible--monthly on the one with the highest rate. After that account is paid off, you continue this with the account having the next highest rate. This is a common method used for paying off credit cards, but it can also help you prioritize and pay off other forms of debt.

Good Debt

There is such as a thing as good debt. A mortgage is good debt since it is money applied towards owning the property that you live in. You need shelter, so as long as it is affordable, a mortgage is good to have. Student loans are also good debt. Schooling is necessary in order to have a higher income. Federal loans carry a low interest rate. Private loans have higher rates that are often variable, so these are loans you don't want to have. Federal student loans and mortgages have something in common. They are tax deductible. These should be the last debts you pay off.

Credit Cards

Credit cards can carry rates of thirty percent or higher. They have annual fees and late fees. Having high balances also hurts your credit score. Pay off the highest rate card first, and then the next highest until they are all paid off.

Personal loans

Deciding whether to pay off personal loans or credit cards first depends on what rates you have. If your personal loans have higher rates than your credit cards, choose the personal loans.

Car Loans

Current car loan rates are only about five percent, so they shouldn't be your priority in managing your debt. If you have a higher rate, inquire about refinancing your vehicle. Credit unions offer great rates on loans.

Pay on Time

When paying off debt, be careful to pay all accounts on time. Managing several lines of credit can be overwhelming. In the snowball method, you pay the minimum payment on several accounts. If you make late payments, it will cost you big. Credit card companies can increase your rates. Mortgage and car accounts can charge you late penalties. All creditors can report to the credit bureaus. So, stay organized and create a plan for managing your debt repayment.

Improve Your Credit Score - Free Consultation

Need debt consolidation relief? Click here!