If you have debt, whether it's a loan or a credit card balance, the most important thing to do is to make the minimum monthly payment. Missing a payment will hurt your credit score and may cause the interest you pay on your debt to rocket. Once you've made the minimum payments, concentrate on paying the high-interest debt. In most cases, credit cards have a higher interest than loans, but not always. Pay whichever debt is more expensive first.
Types of Debt
Credit cards are a type of unsecured revolving debt. Loans can be either secured or unsecured. With a secured debt, you have to put up a house, or another high-value item, as collateral to guarantee that you will pay back the lender. If you miss payments, the lender can take the collateral and sell it to settle your debt. With unsecured debt, the lender cannot take your house. The most they can do is get a court order to put a lien on your house or to garnish your wages. Secured debts are a safer bet for lenders and, therefore, have lower interest rates. However, they pose a much greater risk to the borrower.
Paying Off Debt
Once you've made the minimum monthly payments on all of your debts, concentrate on paying off the most expensive debt. This is probably the credit card, but can also be a loan. If you've put up your house to get the loan, pay that off first. You don't want to risk becoming homeless. Do not cancel all your credit cards as soon as you've cleared the balances. Having a longer credit history will help your credit score. Just stick the card in a drawer and don't use it.
When Not to Pay Off Debt
There are times when paying off a debt in full is not the best idea. If you have a zero-interest credit card, make the minimum payment, then carry the rest of the balance until that offer expires. Put the money you would have used to settle the debt into a high-interest savings account. Pay off the card as soon as it starts accruing interest. Similarly, if you have a choice between investing in a matched pension fund and paying off a low-interest debt, you may want to do the former. You can always pay the debt later, but you won't always have a chance to have your 401k contribution matched by your employer.
Budgeting
Whether you're paying off loans or credit card debts, you will need to budget. Creating a budget is easy; sticking to it is not. Make a list of all of your earnings, minus taxes. Then make a list of all of your expenses, including mortgage or rent, car payments, utilities, gas, food and clothing. The only way to save money and pay off debts is to spend less than what you earn.
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