People who incur debt from loans and credit cards can have their lives ruined by the constant collection calls and stress from never-ending bill payments. The best way to get out of debt is to organize your list of creditors and decide which debt to pay back first. Unfortunately, that process sounds easy, but there are a lot of factors that go into deciding which creditor to pay off first.
Due Date
Look at which credit card bills or loans you're behind on. Catching up on your monthly payments is necessary before paying off any creditor. If you fall too far behind on your payments creditors may choose to take you to court and ask for a judgment to be placed on your bank account or call in a loan, both of which can have devastating effects on your credit. If you're only a month behind, most creditors will not do anything more than send letters requesting you to make your monthly payment. If you fall two or more months behind, creditors will begin assuming you simply can't make the payment and may choose to act.
Secured Loans
Secured loans represent the biggest risks of all debt. A secured loan is a mortgage loan, auto loan or any loan that is secured with something of value. If you fail to pay the loan, you may lose whatever you offered as collateral, so it's always ideal to pay off any outstanding secured loans, if doing so is realistic. If you have $3,000 left on your mortgage, for example, paying off the loan alleviates any worries your house may be repossessed and it puts more money in your pocket each month to pay other creditors. If you loan balance is $40,000, paying off that amount is likely not realistic, and you're better off attempting to pay off the next creditor on your list.
Highest Interest Rate
If you cannot pay off your secured loans, or you already have, the next step is identifying which loans or credit cards carry the highest interest rate. High interest rates can bury you in debt if you only make the minimum payment, so paying off high interest credit cards or loans is the best strategy for your long-term finances. But, you again have to make a judgment call. If a credit card with 20 percent interest carries a $20,000 balance, while your other credit card with a 15 percent interest carries a $2,000 balance, it's faster and more efficient to pay off the lower balance. If the difference in outstanding balances is not extreme, pay off the credit card or loan with the higher interest rate first.
Minimum Payments
Regardless of which loan or credit card you aim to pay off first, you must still pay the minimum payment on all other outstanding balances. Failure to do so will mean potential late fees, loan defaults and legal action from the creditors. Calculate how much it would take to meet the minimum balance for all your credit cards and loans. You can use any money left over to pay off your targeted debt.
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