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Our parents or grandparents' generations did not carry the amount of debt many consumers feel comfortable accumulating today. Between home loans, multiple credit cards, auto loans, and student loans, just to name a few, we can sometimes get ourselves overextended. It is important to manage a debt level you know you are capable of repaying on time and reasonably. A proven management method is to prioritize your bills and pay those most necessary for your family: food, utilities and shelter.
The first step is getting a realistic understanding of your current situation - how much money you take in each month; how much you spend; and how much you can save. It takes commitment and consistency, but the rewards are worth it—both financially and emotionally. People do it every day, and you can too.
Here are 14 steps for prioritizing your debts.
- Understanding how much debt you've accumulated is the first step toward reducing it. List your debts and organize them by the total balances, interest rates charged, and monthly payments. By cataloging your outstanding debt, managing it becomes much easier. Once the debt is organized, categorize each debt according to the importance of staying current with them (e.g., creditor, months, delinquent/amount). List your specific financial problems starting with the most serious need first. For example, if you are late on your mortgage, list this first. Then list other needs, i.e., car, phone, credit cards, etc. Your complete knowledge of your obligations is one of the most important factors in assessing and prioritizing your debts.
- Put your debts in order from the one with the highest interest rate to the one with the lowest.
- Pay as much as you can on the debt with the highest interest rate. In general, the quickest way to pay off all your debts is to first pay off the debt with the highest interest rate (usually a credit card or personal loan), so each month you'll want to pay as much as possible on that debt.
- Focus on the debt with the next-highest interest rate once you've paid off the one with the highest rate. Once you've paid off that one, proceed to the next highest, and so on until you're debt-free.
- Prioritize to stay afloat. If you're having trouble making ends meet, take care of the bare necessities, like food, first.
- Keep a roof over your head. If you own your home, the mortgage payment is your highest-priority debt. In the U.S. lenders will typically begin foreclosure proceedings after three missed payments, though this may vary. Even if you get just a month or two behind, you may have trouble getting your payments back up-to-date, which can cause you problems down the road. If you rent, you can usually be evicted after just one missed payment, and then you'll be faced with finding another place to live with a huge blemish on your record. Whenever possible, use any income available after paying for food and utilities to pay your monthly mortgage payments.
- Pay your utilities. Power, phone, water, and other utility companies will usually give you some leeway in missing payments, but if you get too far in arrears, they'll shut off your service, which can make everyday living very difficult and can also make it more costly to get service in the future. If you can't pay your bills in full, call the company and see if you can work out a payment plan. Most utilities have such plans and are accommodating.
- Keep your car. If you need your car to get to work or to find work, it's important that you keep your payments up-to-date. Finance companies can repossess cars fairly easily, and in many cases they don't even have to give you notice. Make sure to pay your insurance, as well, because it's the law and because if you don't the lender will add their own insurance, which will cost you far more while only protecting the lender's interest.
- Pay child support. Failure to pay child support can land you in jail.
- Pay taxes. Failure to pay property taxes can cause your property to be seized, and failure to pay income tax can send you to prison.
- Pay student loans. The government backs student loans, and if you go into default they can take collection actions that other creditors can't. Private student loans cannot be discharged in a bankruptcy, but they do not have the same strong legal remedies afforded to federal student loans.
- Pay your lower priority debts. Credit cards, loans secured by household objects, personal loans, and store charge cards are not high priorities. Pay the minimums on all these if you can, but if you have to choose between your credit card bill and your mortgage, choose your mortgage. The reason why credit cards are lower priority is because they are unsecured and not afforded any of the legal advantages of other debts, notably student loans. Make no mistake: credit card companies want your money, as much as you're willing to give them. However, they're also open to negotiating different terms when asked before there's real trouble or a third party requests a compromise. Cut up the other cards to avoid temptation, but leave the accounts open as you continue to mend your credit.
- Pay medical bills. Medical bills offer a bit more leniency than most other kinds of loans, and even if they go on your credit report they're generally looked at differently than other missed payments. In the case of the medical bills with an essential provider, by defaulting your payments you may be refused their services. These receive the lowest priority because they are both unsecured and the creditor normally cannot increase the balance by charging excessive interest or late fees.
- Bring accounts up-to-date as soon as you can. Once you've gotten back on your feet, get all your accounts current if you've fallen behind on them. Focus on the ones on which you are the furthest behind. Once everything's caught up, start prioritizing to pay debts off quickly.
Tips
If you can't pay the minimum payments on some of your debts, talk to the creditor and try to work something out. Mortgage lenders are usually very accommodating if you're making a good faith effort to pay your bills and if the situation is temporary. Even credit card companies will generally work with you to waive fees or temporarily lower your payments.
Prioritizing your bills can help you get out of debt, but in order to most quickly achieve financial freedom, you need to also get your spending under control. Look at your spending habits carefully, and cut back on wasteful expenses. Don't live beyond your means, and don't incur any additional debt. If your income still can't keep up with expenses, try to get a better-paying job or a second job. Make these lifestyle changes, and you'll make sure you don't get into debt trouble again.
Your priorities may need to change in some circumstances. If a court judgment is entered against you on an old credit card debt, for instance, that should become a high priority, as the creditor may be able to garnish your wages or take other adverse actions. That said, if you have to choose which debts you can pay, don't let collection activities influence your decision. Collection agencies will try all sorts of tactics to get you to pay them quickly, even if you can't afford it. Don't fall for their tricks, and stick to your guns. Keep your family fed and your house payments up-to-date before you even think of paying on a defaulted credit card.
Be sure to consider fees that may impact your priorities. For example, some credit cards have annual fees that you can avoid if you pay off and cancel the card. Some loans have prepayment penalties, which may make quickly paying those loans off less cost-effective than it would be if you had only to consider the interest rates.
If the interest rate on a particular account is subject to change, as is the case with credit cards that have introductory rates, be sure to consider this. Your priorities may need to change when the rates change.
Sometimes it makes sense to pay off small loans first, even if they don't have the highest interest rates. If you can pay a debt very quickly, you'll have one less bill to worry about, and getting even one bill paid off may give you the motivation you need to proceed on the road to becoming debt-free.
If your primary focus is on improving your credit score, start by paying off revolving credit accounts (such as credit cards) with the highest balances relative to their credit limits. The "utilization ratio," the percentage of your available credit that you are using, is a key factor in determining your credit score, and lenders use it to determine your ability to pay future debts. Understand how paying more than the minimum can be a critical step in reaching your goals. This is particularly true for credit cards, though it may also be useful for paying other loans, such as those used to buy furniture, appliances, or electronics.
Always think about the consequences of late payment, and customize your priorities around special circumstances. If you owe a shady loan shark, and he might break your legs, for example, that debt should move to the front of the line.
Individual financial situations and obligations vary considerably. This article should only be considered a general guide and is not intended to replace professional legal or financial advice. Prioritize your bills according to your unique situation.
Debt Prioritization: Paying Appropriately
Most of us have had issues with a creditor at some point in time. Whether dealing with the IRS, a hospital, or a credit card company, it is important make an informed decision about which accounts should be paid first, in the event that available funds do not allow all bills to be paid. This should be a great head start for those looking to prioritize their debt, and make correct decisions when it is time to write the checks each month.
Set Goals, Make a Plan and Track It
Set a big goal, such as paying off your debt in three years, and then break this goal into a series of smaller ones that will help you reach the finish line. Create an income and expense cash flow worksheet in Excel to help get you there. You can even get your loved ones to participate and to motivate each other until you reach your goal.
Put your plan for reaching your goal on paper. Before putting your plan together, request a free credit report so you can understand how your credit history looks to others. You're allowed one free report a year, so once you accomplish your goals regarding credit card debt help, make sure your future financial management includes reviewing your credit history regularly.
Using the plan you've developed, track your spending carefully with a daily journal so you can look for additional ways to save. The more money you can apply to your debt each month, the sooner you should be out of debt. From each paycheck, carve out what it will take to pay the debt down. This is really easy. Remember, dinner for two at McDonald's runs about $10. What if that money was applied to your credit card debt and you had a salad at home? Your physical and financial health would improve exponentially.
Lately, many financial experts have been touting the benefits of consumers examining where they spend little bits of money they don't think about, and how budgeting can really make a difference to their financial well-being.
Spending On Essentials - Avoiding The Extras
The first step of the debt prioritization process has nothing to do with actually paying bills. Each purchase you make each month affects which debts you will be able to pay, and how much you will be able to pay towards those debts. It is extremely important, when in a situation where your bills may exceed your available funds, to spend money only on essentials throughout the month. Curb your spending—freeze unnecessary spending while you assess the problem and make plans to get out of debt. Cutting spending can come in many forms. It may mean passing on buying big-ticket items, or it may mean bringing lunch to work or school rather than eating out every day.
Paying off your debt means cutting your spending immediately. It may also mean talking with creditors, debt collectors, and credit or debt counselors. Some of your regular, periodic expenses are luxuries - things like house cleaning, manicures, lawn-care services - do them yourself, or do without. Trade in those luxuries for the big luxury of paying off your debt. Each of these responsible decisions will seriously affect your bottom line each month.
- That expensive coffee grabbed in the morning rather than having coffee at home or at work, bringing lunch instead of spending $7-$10 a day to grab lunch at a sandwich shop, not ordering expensive drinks at restaurants and going out less - these are things everyone can give up or change that will make a big difference in monthly expenses.
- Purchase food at the grocery store instead of going out for an expensive dinner.
- Other things like premium cable, cell phone service with all the extras, new CDs or buying online music, and many other items like these are luxuries we may want but don't need. Often you can opt for a less expensive cable or cell phone service package with no penalty for changing, and this will save you real money every month.
- Other items like an expensive car lease or apartment may take longer for you to downsize, but with planning you can. Making these changes can add up to hundreds of dollars a month or more. This will provide you with money you can use to start making a real difference in paying off your debt.
It is equally important not to take on new debt until you get your finances under control.
Different Types of Creditors and Accounts
Just as you should designate which purchases are “essential”, you should also make an education decision regarding which debts are more time sensitive than others. Educate yourself by learning and understanding interest and late fees. Know your interest rates and what the late fees are on all of your debts. Avoid late fees to ensure they're not adding to your debt, and explore options for lower interest rates. If you can't make a payment, call the banks or companies you owe and talk with them about your situation to explore the following:
- Forbearance. You are allowed to delay payments for a short period, with the understanding that another option will be used afterwards to bring the account current.
- Reinstatement. When you are behind in your payments but can promise a lump sum to bring payments current by a specific date.
- A Repayment Plan. If your account is past due, but you can now make payments, the lender may agree to let you catch up by adding a portion of the past due amount to each current monthly payment until your account is current.
If you don't understand or aren't familiar with a debt term, you can find an online glossary for help.
Unsecured Creditors versus Secured Creditors
Unsecured creditors are creditors who have loaned you money, or sold you something, based solely on your agreement to pay them back based on a specific set of terms and conditions.
Secured creditors are creditors who agree to sell you something, or loan you money, based on your promise to pay them back based on a specific set of terms and conditions, and some type of collateral used as a guarantee. In most cases, the creditor may take your collateral in the event that payment requirements are not met, or you violate other terms of the contract. Remember, if you don't pay off secured debts, such as housing and transportation, they can be foreclosed on or repossessed. Since losing a place to live or means of transportation can be disastrous, these responsibilities take first priority. Other secured debt can result in a garnishment of wages, so arrange workable payment plans for debt such as student loans, health bills and child support.
Alternatives
Sometimes additional income or savings is the only solution to credit card debt help, enabling you to do more with more. But where will that additional money come from?
Here are some common alternatives:
- Asking for a raise at your current position or searching for a new job.
- Taking on part-time work specifically to use the additional income to pay off debt.
- Reducing the clutter in your home by holding garage sales and using all profit as extra credit card payments.
- Taking out a small loan and cutting up all credit cards. This is really a last resort option as to not run the risk of getting deeper in debt.
Finally…
Commit to achieving your goal and figure out what's going to keep you motivated to stay on track. Consider sharing your goal with someone and ask him or her to be your “Debt Coach” then asking him or her to help “keep you honest” by checking in on a regular basis to see how you're doing. Reward your success.
Be patient. It probably took you time to get into debt, so acknowledge that you're not going to get out overnight. Keep yourself motivated. And remember, getting out of debt will change your outlook on life. It's worth the hard work.
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