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Prioritizing Debt Repayment


Making credit card payments detracts from your saving goals, whether for retirement, a new home, or something else. Trying to determine which of your debts to pay down first can be a difficult decision. However, making extra payments toward high interest or unsecured loans can help you meet your goal of being debt free much more quickly.

The quickest way to get your goals on track is to eliminate credit cards or other consumer debts that carry a high interest rate. Not only is this an on-going monthly obligation; it costs extra to pay the interest portion of the payment. For example: your credit card has an interest rate of 18%, a balance of $5,000 and a $150 minimum payment. It might take nearly 4 years to pay off the full amount, and you may have paid nearly $2,000 in interest alone!

Another strategy that might help is to pay off any accounts with a low balance first. It may bring you peace of mind to have one less payment to make each month. With this payment gone, you can apply the extra money to your next lowest balance on a credit card or loan.

Also, keep in mind that for credit purposes consumer debt is not considered “good debt” (credit cards, personal loans, etc.). On the other hand, loans such as mortgages and vehicle loans can strengthen your ability to obtain credit in the future.

When paying any medical bills, typically they do not have finance charges. If you can make an arrangement with medical providers when you receive the first bill, they may allow you to make a minimal monthly payment without any negative impact to your credit. These may be the balances you pay off last.

By: Ross G. Allen, CFP ®