Prioritize your debts to pay off bills the smart way - KPTV - FOX 12

Prioritize your debts to pay off bills the smart way

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By Andrew Housser


While it is not financially healthy to have a great deal of debt, a significant portion of the population faces debt every month. These might include bills for student loans, a mortgage, a home equity loan or line of credit, auto loans and credit cards. People with large amounts of debt might worry that they will never become free of that debt. But by using straight-forward techniques, it is possible to get out of debt more quickly and minimize the interest you pay.

1. Make payments on secured debts.

The first type of debt to pay is secured debts. This means debt that is secured by an asset, such as your home or vehicle. If you fall behind on a secured debt, you risk losing that asset – such as foreclosure on your home or repossession of your vehicle. In your monthly budget, prioritize payments on these bills. In addition, mortgage interest payments are tax-deductible for most borrowers, unlike credit card and other debts. The deduction effectively reduces the interest rate – which already is likely to be lower than credit card interest rates – further.

2. Pay very high-interest debt.

Some people are indebted to payday lenders or other short-term lenders that charge very high interest rates. In fact, some sources say that interest on payday loans can amount to 300 to 600 percent per year. Often, people borrow a small amount to start, but fees and interest quickly snowball. Pay off any existing payday loan debt as quickly as possible, and do whatever you can to not take on any more payday debt

3. Pay student loans.

If you fall behind in payments on government student loans, some lenders can garnish your wages to secure repayment. Additionally, student loan debt generally cannot be discharged in a bankruptcy filing, meaning it always must be paid. Borrowers whose circumstances make it problematic to repay their loans have some options. Ask your lender about income-based repayment, deferment or forbearance plans. These plans might reduce or eliminate payments for a few months, until your income stabilizes and you can afford the payments. (If you are still in school, it pays to work to minimize the amount you borrow in student loans.)

4. Pay off small debts.

Next, if you have small debts that you can pay off in a month or two's time, consider working hard to pay these off. The reason? Some studies show that achieving a small “win” – such as seeing a zero balance on a debt of a few hundred dollars – can provide the boost and confidence that makes it more likely that you will continue with the commitment necessary to become debt-free.

5. For remaining debts, choose a method: snowball or avalanche.

Several schools of thought exist on the best way to pay off debt. Two of the most popular methods are nicknamed the “snowball” and the “avalanche” methods. The avalanche method can save more money in the long run, because you save on interest payments. However, research shows that people who follow the snowball method have a higher success rate. The bottom line is that it is most important to find the method that you will stick with until you get out of debt.

The Snowball Method builds – like a snowball – from a small start to a bigger accomplishment. First, list your outstanding debts, from smallest to largest amount owed. Pay the monthly minimum on all debts, but each month, pay the minimum plus all additional available money to the smallest debt, until it is repaid. Once the smallest balance is eliminated, use the same approach to tackle the next smallest balance. Continue this way until everything is paid off.

The Avalanche Method starts at the top and flows to the bottom. For this method, list the debts you owe from highest to lowest interest rate, regardless of total amount owed. Again, pay minimum payments on all debts. Here, however, apply all extra money to the debt with the highest interest rate. Once that balance is eliminated, move on to the balance with the next highest interest rate. Continue until all balances are gone.

With these five steps, in time, you should be able to pay off your debt and enjoy the liberation of being debt-free. It does require patience and perseverance. People with major debt might require several years to complete the task, but the reward of being debt-free is worth the effort. If you are having trouble making even your minimum payments, however, seek help from a credible debt relief professional. Check the American Fair Credit Council for good options.

 

Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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