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How to Pay Off Debt

So many of us today are forced to make decisions about our finances, and you may be wondering, how to pay off debt in the quickest and most efficient way possible.  There a many types of debt, and which debts you pay first and fastest, can make a difference in saving your credit score, and making the most of write offs at tax time.  When you follow some simple rules when looking at how to pay off debt, you can make a difference pretty quickly.

How to Pay Off Debt Most Effectively

Looking at how to pay off debt most effectively, we must determine what type of debt you have.  The most common debt is credit card debt.  Credit card debt is considered unsecured debt, meaning, you did not have to put up any collateral to obtain credit from the credit card company.  Credit card debt typically carries the highest interest rates, but it also establishes credit very quickly.  If you are able to payoff your full credit card balance every month, you can build your credit score quickly.  When you carry a balance on your credit cards, you continue to incur interest at a high rate, so this is normally the debt you want to pay first.  

Many of us also carry secured debt such as a mortgage or car payment.  These loans are secured by the property you are paying on, and if you default, your home or vehicle can be taken from you.  Mortgage and car loan rates are typically less than credit card rates, and therefore, paying off your credit cards first makes the most sense financially.   Many people can also write off the interest they pay on there homes at tax time.  Contact your tax professional for more information.  Keep in mind when you are looking at how to pay off debt, you want the most bang for your buck.

How to Pay Off Debt when you are Struggling Financially

Often we look at how to pay off debt when we are struggling financially.  Maybe your family has suffered a job loss, illness, or quite simply, you took on too much debt and it has caught up to you.  In this case, the rules change.  Like I said before, when you don’t pay your secured debts, your home or vehicle, can be taken from you.  You must ALWAYS  pay your secured debts first on a monthly basis.  When you are in a financial pinch, it is not the time to try to pay off debt.  Trying to keep up with your monthly responsibilities has to be your first priority.  Your home is first, for obvious reasons.  Your vehicle should be next, because without your car, how can you get to work and make money.  After your home and your car you have to budget your normal living expenses.

If there is no money left for your credit cards, you may have to look into bankruptcy or bankruptcy alternatives, because even though this debt is not secured, it can become a judgment, which gives the creditor access to your bank account, the opportunity to garnish your wages,  and future tax returns.  When you get back on your feet, you can start re-building your credit history.  We can learn how to pay off debt and use these skills in the future.

To your success,

Lori :)