Being in debt can be a very scary feeling. Always feeling like you are behind, and never able to get ahead. Student loans, Car payments/repairs, hospital bills, credit card debt, the list only goes on and on. One big question I hear a lot is: what debt should I pay off first? There are a few basic rules I have when it comes to paying off debt.
#1 ) If a debt payment is approaching being late for 90 days this takes top priority. The reasoning behind this is that once a payment is late for 90 days or more it will have the biggest impact on your credit score. It will in most cases being this late will negatively affect your score for 7 years! A missed payment for 30 or 60 days is not good for credit, but the drop off is much larger after 90 days.
Credit scores are designed to predict the future, and not paying a charge for over 90 days shows you are more likely to do that again in the future. Once your debt is over 90 days late most of the damage has been done, although collections, and repossessions can cause some additional drop in credit, it is better to prioritize any payment that is close to 90 days, and pay that off first.
#2) Pay the minimum of every debt, every month. If you have multiple sources of debt it is easy to track when things are due using your phone’s calendar feature. I always set reminders for bills a few days before they are due to ensure they get paid on time. I traditionally will set things up for a Tuesday or Wednesday at 7pm. I know 90% of the time I will be home at these times, and have easy access to a computer. This will also make you not have to worry about #1 above.
#3) Pay off whatever debt has the highest interest rate first. Traditionally credit cards will have the highest mark (10-30%), but car loans can be high as well. After paying the minimums for other debts, send all extra cash to the debt that has the highest interest rate. The higher the interest rate the more money you will have to pay the longer you owe the money. Being able to pay off a big chunk of the high interest rate debt will reduce the amount of interest you pay in the future, and increase the amount of your money that actually pays off the principal.
When it comes to paying off student debt, pay off the loan with the highest interest rate first. For example, I have multiple loans I am still paying off that varied from 3% to 6.5% . I started putting all extra money to the loans with the higher interest rates to ensure they will be paid off quicker, ultimately helping me become debt free sooner.