Which Of My Debts Should I Clear First?

By Nicholas Hunt

keywords: debt elimination clear debts

When it comes to eliminating debt, many people are uncertain which of their outstanding bills to pay off first. While the logical answer may seem to point towards the direction of the debts with the highest interest rates, that always is not the best route. The first step to eliminating debt is to assemble all current debts and verify their current balances and interest rates. Also, comparing interest rates over time also helps to establish the priority of that debt.

After your known debts and their respective balances and interest rates are known, the next is to prioritize them according to their interest rate. For most people, their mortgage, student loans, automobile loans, and credit card bills usually rank in the top positions. Next, while some of these debts may have higher interest rates than others, it is important to consider that many offer incentives to pay them last. Student loans, for example, have interest attached to them that can be claimed on most people's income taxes. The same can also be said for mortgage insurance premiums and other homeowner expenses. After checking eligibility to see if any outstanding debts can offer income tax reduction, eliminate them from your list of debts requiring priority payoff.

As your list of outstanding debts becomes smaller, multiple credit card balances have to now be scrutinized. Compare interest rates over the period of the balance. Did any of them change dramatically over time? If so, it is time to consider transferring that balance to a smaller interest card, or it is time to call that credit card company and try to negotiate a smaller interest rate. However, if you are going to call one credit card company, why not try to call them all? Present your lowest interest card that you currently have and ask them to match or beat that rate, or you will consider transferring your balance with that company and giving your business to the company that will provide you with the lowest rate. Most credit card companies do not want to lose business will try to accommodate your needs. In fact, some may even try to upgrade you to a zero interest credit card with a higher spending limit. Should you be offered this as a solution, accept it only if it has no annual fee, does not require you to keep an minimum balance in order to keep the zero interest rate, and when the promotional rate expires, find out how much the 'new' rate will be.

If you do decide to try for a zero interest credit card after finding out all of the fine print, then transfer all of your balances from your other credit cards onto this new credit card and immediately cut up all of the old cards. Now that you will be saving in interest, it is time to apply what you would normally be paying in interest every month to the principal balance. For example, if you paid a total of $1000 per month in credit card bills, usually only $750 - $900 would actually be going towards the principal balance. With this new debt reduction plan, the entire $1000 can be applied directly to your debt, thus helping to reduce it faster.

Be sure though, that you do not fall into the habit of paying the minimum balance required by the credit card statement each moth. Treat this new organization of your debt in the same manner as before with respect to the allocation of your monthly funding - at minimum! Always strive to cut more corners and shift more of your monthly income to debt elimination. It may take a few years and a few balance transfers here and there, but in the end you can rest easier at night knowing that you are on the road to eliminating one of the biggest obstacles towards your financial freedom.

keywords: debt elimination clear debts

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About The Author
Nicholas writes for Debt Nation who offer advice on how to clear your debts through consolidation, IVA, or a debt management program. Visit today to get help with your debts.