“Should I repay my student loans first or my credit cards?”
This is a question many of us have asked ourselves at one time or another. Paying off your financial obligations is a worthy cause but prioritizing some of your debts over others can provide more benefits to you. Here are some tips to help you decide how to pay off your debts.
Prioritize by Type of Debt
It is important that you understand the type of debt you are dealing with. There are good debts, and there are bad debts. Loans you get for an education or a home are considered good because they help improve your financial position.
Some good loans are tax deductible. Mortgages and student loans provide tax breaks on the paid interest and you only need to pay the regular monthly payments for them. While it should not be a reason to exclude them in the priority list, it makes sense to pay them later.
On the other hand, bad debts don’t help in improving your financial status. You can’t repay the borrowed money in full within a few months. Some examples of bad debts are personal loans and credit card balances. In general, you should prioritize paying off these financial obligations because they have higher interest rates than good ones.
Start with Lowest Balance
Once you have a list of your bad debts, the next step is to determine which one to pay off first. One method to determine their order is through their balance. You can try using the snowball method, which starts repayment from the debt with the lowest balance. You make the largest possible payment on it while making minimum payments on the other remaining balances.
Paying off financial obligations with lower balances frees up money fast, allowing you to use it towards others. It also provides you with the motivation to continue with the method. The short-term success can help inspire you to achieve the long-term goal of paying off all the money you borrowed.
Pay Off Debts with Highest Interest
Another way to determine the order to pay off debts is through their interest rates. The one with the highest interest rate costs you the most money per month. If you can get rid of it quickly, you gain more control over your finances.
Paying off borrowed money with high rates before those with low rates will save money in the long-run. It is better for your financial status to pay one with 18 percent interest than to pay one with 5 percent interest.
On the downside, you might end up spending more than a year repaying the debt with the biggest balance. It could be hard to stay focused on repaying it if you don’t see results right away.
Highest Credit Utilization
If you are thinking of applying for a loan soon, consider paying off existing loans taken from nation 21 loans options with the highest credit usage first. That way you can improve your credit score while paying off borrowed money. If your loan has already gotten away from you, don’t worry. Read up on how long do collections stay on your credit report, apply it, and move forward.
Credit utilization ratio is the percentage of your credit usage compared to the total amount you can borrow. Lenders usually prefer borrowers with less than a 30 percent ratio. The lower you can bring your credit utilization ratio, the better.
You should consider paying off credit cards with ratios higher than 30 percent, even if other financial obligations have higher interest rates or balances. It will help improve your credit rating and give you access to lower rates on the future car or home loans.
Which Method is Right for You?
The answer to this question depends on the financial situation and your personality. If you have a hard time sticking with a single goal using short-term milestones, then prioritize the one with the lowest balance. It allows you to achieve success the fastest and keeps you motivated along the way.
If you want to improve your credit score for a car or home loan in the next couple of months, then order the payments by their percentage of credit usage. Place the ones with no limit at the bottom of the list. Through this method, you improve your credit utilization ratio faster, which is an important factor in your credit rating.
Some people claim that paying off debts with higher interest rates first is themost efficient method. The strategy provides them with more money in the long run. You can then use that money to repay financial obligations faster. Other consumers take a balanced approach in paying off their obligations. They set a goal and use a strategy to help them achieve it as fast as possible. They choose debts they can realistically pay off in a couple of months and put them at the top of their list.
Stick with Your Repayment Plan
No matter what your strategy might be, the key to achieving success is to stick with it until the end. Once you have decided on a repayment plan, be sure to map it out on your calendar to keep track of when everything will be paid off. This allows you to monitor your progress and motivates you to repay all the borrowed money.
Rewarding yourself after paying off a debt provides more motivation to stick to the plan as well. Your spouse or a trusted friend can act as an accountability partner to help you stay focused on your goal. With patience and determination, you will be debt free in no time.
As you get rid of your debts, roll the amount of the old payments to the next one. That way you can pay off all your financial obligations fast. By the time you have one debt left, you’ll have accumulated a large amount to put towards repaying it.
Be Prepared to Change Your Lifestyle
It’s important to remember that different solutions work best for different people. Not everyone is experiencing the same financial situation and each individual will have a different mindset. People also experience unique opportunities and obstacles.
Financial success doesn’t come easy. While choosing the right strategy is a factor in achieving it, you should also cut personal expenses and use the extra money to repay financial obligations.
No matter what method you choose, reducing overhead costs and making extra payments to the top priority on your list will lead to success over time. Changing your lifestyle and mindset will lead to even better results.