How to Prioritize and Repay your Unsecured Debts

Trying to pay down unsecured debt can often feel like an overwhelming task. It’s not surprising: in 2010, the average household with credit card debt had $15,956 in credit card debt. And while its relatively easy to keep track of a single, monthly mortgage payment, credit cards can be more complicated. Consider that, in 2008, the average cardholder had 3.5 credit cards. If you have 4, 5, or 6 credit cards, all with differing fees and interest rates, it can be tough to know where to start. This article will help you break down and pay off your debt in a manageable way.

The first thing to do, as the title of this article would suggest, is to prioritize what debts you are going to pay down first. Usually, this means starting with the card carrying the highest interest rate. This is the best move financially, as it will minimize your interest charges. Some people prefer to start with the card with the smallest balance, believing that this will help them to stay motivated. This can actually be a good move financially if the cards you are paying off have been charging you annual fees, or if their interest rates may change soon. More important than the order you pay your credit cards in is that you pick a plan you can stick with. Once you have decided on a card to pay off first, you will want to pay as much as you can towards that card every month until it is paid off completely.

There are two important things to remember as you pay off your first card. The first is to continue making the minimum payments on any other debts you might have. Not making payments on time can result in late fees far more expensive than the annual interest rates, to say nothing of the damage to your credit. The second thing is to make sure you aren’t adding more debt. Putting $500 a month towards paying off one card doesn’t do any good if you’re simply adding that $500 to another card. If you want to get out of debt, you’re going to have to consistently reduce your total liabilities, not just shuffle them around.

Ways to speed up your debt repayment:

So let’s say you’ve organized and prioritized, you’ve cut back on your spending, but you just aren’t making much progress. Maybe you can only afford to pay slightly more than the minimum payment, and you’re barely making a dent in your total debt. The good news is, there are ways to rapidly reduce your debt, if you know where to look.

First, you’ll want to look at savings. Nowadays, most savings accounts are paying a pittance, yet many Americans have large savings accounts and piles of credit card debt. Use your savings to pay off your debt and you’ll save big on interest. Even the stock market can rarely beat the high interest rates credit cards charge. Anytime you use lower-yielding investments to pay off high yielding debt, you come out ahead. If you don’t have much in the way of savings, you can try transferring your balance to a lower yielding card. The reduced interest charges will allow you to pay off the principal much faster. You might even want to get a new card with a 0% teaser rate. Just make sure you’re only using these balance transfers to facilitate your debt repayment, not to make room for more spending. Finally, you might be able to access funds in your 401k. This can be a good choice because there is no credit check (you’re borrowing from yourself, after all) and the interest rate is usually very low. However, you want to be extremely careful with this option. If you miss a payment, lose your job, retire, or reach the age of 59 and a half before paying off the loan, the IRS will consider the loan an early withdrawal and charge you taxes and penalties. Also, the repayment is usually deducted straight from your paycheck, just like your normal 401k contributions, so you’ll have to be absolutely sure you can afford to make those payments. Again, you’ll need to take into consideration what you can save on interest by getting rid of your high yield debt.

Developing a concrete plan of action is the first step to managing and getting rid of your debt, but it is not the most important. Having the determination to put your plan into action and the discipline to follow through is absolutely essential. With any luck, you now have an idea of where to begin. The rest is up to you.