In America, it is perfectly reasonable to owe some amount of money, either to credit card companies, student loans, or other bank accounts. When paying off debts, it is essential for people to understand that they should pay some loans off before sure others. If you are in arrears for several obligations, it’s vital to pick and choose what’s important to pay off, and which deficits will help your financial standing.
Those in debt should make the following considerations when paying off these accounts.
Pay “Bad Debt” Before “Good Debt”
Experts consider certain debt as “good debt.” This includes money people borrow to pay for a home or for schooling, which can ultimately improve a person’s financial situation. Also, people can deduct some debts, such as interest on mortgages and student loans, from their taxes. While people should strive to pay off these types of debt on time, there is no reason to pay them off ahead of time if they don’t lower your credit rating.
On the other hand, “bad debt” is debt for items that will not improve a person’s financial situation and that will take some time to pay off. This includes credit card debt and personal loans. People should try to pay off this type of debt first.
As a rule of thumb, people should pay off their bad debt based on the rate of interest they are paying. This means that they should pay off high-interest debts before paying off low-interest debts. For example, paying $1,000 off a credit card that charges 20 percent interest is better than paying $1,000 off a debt that only costs 10 percent interest.
Though sometimes paying a small debt off in full can provide psychological benefits. By paying this debt completely off, people can gain momentum toward paying the rest of their debt.
Pay off Bills That Can Affect Credit Ratings
Credit ratings can dramatically affect people’s lives, especially if they are planning on making a big purchase, such as a home. In these circumstances, people should strongly consider paying off credit cards that are close to reaching their limit. It will improve both their utilization ratio and their credit score, which in turn can help them not only get approved for a loan but also get them lower interest rates on the loan.
An Important Caveat
Those who have a high amount of high-interest debt often consider paying it off by obtaining a home equity loan or by borrowing from their 401K; but this is usually a bad idea. By borrowing from a 401K, people can lose significant tax benefits, and defaulting on a home equity loan could lead to the loss of that home.
Monroe Bankruptcy Attorneys Can Help You
If you’re not sure what to do with all of your obligations, you might be better off speaking to an expert attorney. Contact E. Orum Young for a free bankruptcy consultation. With more than 35 years of practice, our lawyers will help you figure out if you can solve your debt, negotiate with creditors for you, and file all the necessary paperwork so that you can focus on the critical things in life.