Should you get rid of student loans or credit card debts? Should you pay off your auto loans or mortgage? Paying off debt is a good financial move since it liberates you from the shackles of lenders. But which one should you erase first? Check out the following tips to get your answer.
1. Find out if you have good debts or bad debts
Bad debts include credit card debts, payday loans, auto loans, etc. These debts have high-interest rates. Plus, they don’t improve your financial life. A sumptuous meal in a lavish restaurant or an expensive birthday gift is enough to rack up huge credit card debt. Try to get credit card debt help first. Pay off your credit card debts and payday loans since they carry extra-ordinary interest rates.
Home loans and student loans are considered as good debts, They help to improve the quality of your financial life. Mortgage gives you a home; an asset. Student loans help you secure a job and flourish in your career. Most importantly, some home loans and student loans are tax-deductible. So don’t exhaust your funds to pay off your good debts. Just make the required monthly payments.
2. Think about your future plans
Are you planning to buy a home or a vehicle soon? If so, then consolidate credit cards that have a high credit-utilization ratio. Your credit-utilization ratio drops when you consolidate credit card debt and pay it off completely. Let me tell you that a high credit-utilization ratio pulls down your score. Always try to maintain a credit-utilization ratio between 0% and 30%. The lower your credit-utilization ratio, the better for your credit score.
A low credit score is a big turn-off for the lenders. They will either refuse to give you a loan or they will charge a very high-interest. Both are bad for your financial life.
Choose a reliable debt consolidation company and consolidate your credit card debt at a low interest-rate. Make a small monthly payment every month so as to get rid of debt gradually.
3. Ask yourself - Wanna save more or get a psychological boost?
Debt avalanche method will help you save more since you’ll get rid of the high-interest debts first. It’s make sense to put $600 towards a $3500 credit card with an 16% interest-rate rather than paying off a $700 bill at 7% interest-rate. But it is easier to get rid of small debts first. Focus on clearing small debts first if you’ll get a big psychological boost from eliminating a debt completely. Sometimes, a small victory can give you a great confidence to stick with a debt relief program.
A word of wisdom
It’s tempting to liquidate your 401(k) account when you’re immersed in high-interest debt since it’s a bad financial move. Don’t take out second mortgage to pay off your credit cards. You’ll just convert your unsecured debt into secured debt. And, it’s bad to tap your retirement savings. You’ll lose tax benefits. If you lose your job, then you have to pay back the entire amount within 3 months. If you fail, be prepared to face a stiff penalty.If you need help with debt, then opt for debt management since it will help you pay back your creditors gradually. You can also get debt help from debt consolidation companies. But be it debt consolidation or management, make sure you choose a program that suits your current financial situation. Be patient. It’s pointless to expect that your debts will evaporate within a few minutes.