Don’t Pay Debts In The Wrong Order

If you resolve to pay off your debts that’s good but how do you determine which debts to pay off first? The answer can be different for everyone.

Sometimes you’ll hear different advice namely some experts say you should pay off your debts with the lowest balance first even if they don’t necessarily have the highest interest rates. The theory is that paying off debts in full provides an emotional lift that can inspire you to continue attacking other debts. This is commonly referred to as the debt snowball method. It isn’t the approach that will save you the most money but it may still be the best choice if it helps you stay motivated.

When to attack secure debts first: Secured Debt is tied to some kind of asset. Your auto loan for instance is secured by your car. If you don’t make the payments on your auto loan your lender can repossess your car. If you fall behind in your credit card payments the financial institution behind the car can’t seize any of your assets. It can hit you with a late payment fee and cause your credit score to plummet. Debt collectors can even garnish a portion of your wages if you fall far enough behind in payments and they win a court judgment against you. But that’s not as bad as losing the roof over your head or the vehicle you need to get to work. If you are extremely behind on mortgage and auto payments and worried about defaulting, make those payments your priority even if the interest rates on these loans are much lower than those on your credit cards. It may not be the cheapest method of paying back debts but it’s better than losing the roof over your head.

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