When debt starts to accumulate, it can be tempting to start writing checks to lenders any time there's a little extra money in the budget. But as with anything else in life, it is best to analyze the situation and craft a smart, logical plan before you leap into action. Some types of debt are more damaging than others, so follow this guide to paying off your debts the smart way.
Which debts should be your top priority? Those with high interest rates should be addressed first. For most people, this means credit cards, since rates can average between 13 and 15.7 percent. First call all of your credit card companies, and find out what rates you're paying on each card. If you can, transfer high-interest balances to a card with lower interest. Otherwise, pay as much as you can on the card with the highest interest rate until it is paid off, then work on the card with the next-highest interest rate, and so on. If you hold several credit cards with high interest rates, you might consider a consolidation loan.
If you bought your car on a zero-interest special, your car loan shouldn't be a high priority to pay off early. For most people, though, car loans are a medium priority debt. Generally the interest rates are higher than a mortgage but lower than credit cards. It's a good idea to pay off your car loan early, if you can. You might save hundreds of dollars on interest.
Car insurance is also a debt. Did you know that most auto insurance companies charge you more for making monthly installments, rather than purchasing 6 or 12 months of insurance at one time? If you can, avoid making monthly payments and you can save some money.
You might dream of paying off your mortgage early, but it's a low-priority debt in the grand scheme of things. If you're one of the few people still carrying a higher interest rate on your mortgage, look into refinancing the loan.
The main idea is to worry about high-interest debts first, and then work your way down to debts that carry a lower interest rate. But don't forget to save for retirement, and set aside some money in an emergency savings account. In fact, having emergency funds on hand can prevent debt in the future!
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