If you’re working to pay off debt, then congratulations for being an awesome, financially empowered woman! Maybe you’ve just gotten a promotion or have come into a little bit of extra money from a bonus, a tax return, or from selling that extra table that you’ve always hated. You want to use some or all of this money to pay down your debt. The question is, which debt do you choose?
Different Kinds of Debt
Most Americans carry a variety of debt. You may have student loans, a car loan, a mortgage, medical loans, credit card debt, and more. It can all be a little mind boggling and make it difficult to figure out which debt to tackle first.
Clarify Your Debt
Before you make your decision on which debt to pay off first, take some time and make sure you understand all of your debt. Schedule an hour with yourself and build a quick little debt sheet. List each debt and include:
- Name of the debtor
- Amount of debt
- Monthly payment
- Interest rate
- Payment due date
This will help give you a clear view of exactly what you owe, to whom you owe it, and how much you’re paying in interest. This sheet will also help you figure out which debt to pay off first.
If you have any delinquent accounts, pay those off first. Missing a payment is going to result in expensive fines and will damage your credit rating, which will make it harder and more expensive to get loans in the future. Do everything you can to pay off this debt while at least maintaining minimum payments on the rest of your accounts.
Highest Interest Rate
After your delinquent debt is taken care of, your next target should be the account with the highest interest rate. Logically, this will save you the most money in the long term. If you have two accounts with identical balances but one has an interest rate of 6% and the other is a credit card with an interest rate of 18%, obviously you should take care of the credit card.
Our brains don’t always like to work logically. Let’s say you just earned a $3,000 commission check from work. It just so happens that you only have $3,000 left on your car loan. You’ve been trying to pay off your car FOR-EV-ER, and the thought of never making another payment again makes your heart sing. However, you also have a credit card with $5,500 in debt on it. The interest on your car loan is only 4.5%, and your credit card interest is 16%. Logically, you should continue monthly payments on your car loan and use your commission to pay off as much of the credit card debt as possible.
However, we’re not going to tell you not to pay off your car loan. Paying off any debt is better than nothing, and if the prospect of zeroing out an account will inspire you to use your commission check to pay off debt instead of spending it on an expensive night on the town, then go for it with our blessing.
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