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Debts to Pay Down Later. Tax-Advantaged Accounts. Consider an Emergency Fund. The Bottom Line. Key Takeaways If you have several loans or debts to repay, deciding which ones to pay off first can be a difficult task.
Try to prioritize high-interest debts as well as those that will most impact your credit score negatively if you fall behind. This prioritizing based on objective metrics can be hard as people grow emotionally attached to paying off certain types of more benign debts like a home mortgage or student loan first. Article Sources.
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Remember that you will have to keep making payments on all your other debts, but it's worth focusing your spare cash on the most expensive one until it's cleared, then putting your freed up cash towards clearing the next expensive debt and so on until you are debt-free. It is possible to move expensive debt to a cheaper home and this is always worth looking at.
There are several options, however, the options available will depend on your credit rating. Depending on your circumstances, your options can include transferring high-interest credit cards, store cards and even overdraft debts onto a credit card that offers a lengthy interest-free balance transfer. This can help you to significantly reduce the amount of interest you're paying on your borrowing, giving you more free cash to put towards clearing the debt itself.
You might also consider moving to a current account with a more competitive overdraft interest rate. Consolidating your debts is another option but this is rarely as straightforward or cost effective as it can first seem. There is a lot to think about when deciding which debt to pay off first.
As well as considering how expensive a debt is — that is, the rate of interest you are paying on it — you should also consider the size of your debt. Some debts may be large with small interest rates, while others can be small with high rates of interest. You might want to pay off some of your smaller debts straight away just to tick them off the list.
By clearing a couple of these smaller debts quickly you can cross those off your list and concentrate on hitting your most costly debts with freed-up cash, while at the same time keeping up minimum repayments on the rest of your debts and keeping in mind those that are highest-priority. Larger debts aren't always the ones to try and clear first. For example, your mortgage, though high priority as it is a debt secured on your home, is still a long-term debt and so can and should be spread over several years.
To add to all that, after a set period your balance is wiped clean no matter how much you owe. You can read our full guide to paying off your student loan early to see if that applies to you.
If you have several debts to pay off it may be better to hold off saving until those debts are cleared. Though putting a bit aside for a rainy day is always a good idea, any money you have in savings will likely be earning interest at a lower rate than that which is being added to your outstanding debts. As such, it can often be more cost-effective to put any spare cash you have towards clearing your debts rather than building up a nest egg - especially with flexible debts like credit cards and overdraft facilities.
It is really important to discipline yourself not to borrow any more money once you have started clearing your debts, or all your hard work will be lost. Also remember that while it's a good idea to identify which of your debts should be at the top of the paying-off queue and focus on them, don't forget your other debts - you'll still need to keep up minimum repayments on them too, at the very least. Whatever method you choose to pay off your debt, make sure it aligns with your lifestyle and is something you can stick with for the long term.
On the other hand, the debt snowball approach prioritizes the account with the lowest balance, before moving on to the account with the next-lowest balance. While you will pay more in interest charges over time with this method, a quick win early on can be an effective motivator, says Kimberly Zimmerman Rand, principal at Boston financial counseling firm Dragonfly Financial Solutions LLC. What works for one person might not work for another. Bernadette Joy once worked with a client who had personal loans, credit cards, student loans, and money owed to a family member.
Joy said she worked with the client to prioritize the family loan. Short of a sudden cash windfall, there are no quick fixes to debt repayment. Paying off debt requires changing your life habits and relationship to money as a whole. Tracy East from Consumer Education Services, Inc suggests speaking to a nonprofit credit counselor from the National Foundation for Credit Counseling or another nonprofit if you find yourself overwhelmed and unsure how to move forward.
Depending on the amount of debt you have, it may feel like an arduous journey, but achieving financial stability and a positive relationship to money will be worth it in the long run. The Marijuana Industry Is Booming. Mortgages Rates Dropped to 3. I would like to subscribe to the NextAdvisor newsletter. See privacy policy. Before you go, sign up for our newsletter to get NextAdvisor in your inbox.
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