“The Ultimate Guide to Prioritizing and Paying Off Debt”

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How to Determine Which Debt to Pay Off First

When managing multiple debts, it’s crucial to prioritize which ones to pay off first. Generally, it’s advisable to start with the debt that has the highest interest rate. This approach helps you reduce the principal balance faster and minimizes the amount of interest you pay over time.

Credit card debt often carries the highest interest rates, making it a prime candidate for early repayment. According to Federal Reserve data, the average credit card APR as of February 2023 was 20.92%. In contrast, personal loan interest rates averaged 11.48% for a 24-month loan during the same period. However, personal loan rates can vary significantly, reaching up to 36% depending on your credit profile and other factors.

One exception to this rule is payday loans, which should be prioritized even before credit card debt due to their exorbitant fees and short-term nature. These loans can have APRs exceeding 400%, making them extremely costly if not paid off quickly.

Benefits of Paying Off Credit Card Debt First

Focusing on credit card debt first offers several advantages:

• Improved Credit Score: Reducing your credit card debt lowers your credit utilization ratio, a key factor in your credit score. High utilization can negatively impact your score, so paying down these balances can lead to a significant improvement.
• Less Interest to Pay: The longer you carry a credit card balance, the more interest you accrue. By paying off credit cards first, you prevent high-interest charges from accumulating over time.
• Reduced Temptation to Spend: Paying off a credit card and removing it from your regular financial rotation can help you avoid building up debt again. While it’s generally better for your credit to keep accounts open, using the card sparingly or for specific purposes can help you manage your finances more effectively.

How to Pay Off Debt

To start your debt payoff journey, list your current balances, APRs, minimum monthly payments, and due dates. This will help you determine the best strategy for tackling your debt. Here are a few methods to consider:

• Debt Avalanche Method: Focus on paying off the debt with the highest APR first. Make minimum payments on other debts while directing extra funds to the highest-rate debt. Once it’s paid off, move to the next highest rate and repeat the process.
• Debt Snowball Method: Pay off smaller balances first to gain quick wins and build momentum. While this method may not save as much on interest, it can be motivating and help you stay committed to your debt payoff plan.
• Balance Transfer Credit Card: If you have good or excellent credit, consider a balance transfer credit card. These cards often offer 0% APR for a promotional period, allowing you to pay off debt interest-free if you clear the balance before the promotional period ends.
• Loan Refinancing: Refinance existing loans to secure a lower interest rate. This option is available for various types of loans, including car loans, mortgages, and student loans. Refinancing can help you save on interest and pay off the loan faster.
• Debt Consolidation Loan: Combine multiple debts into a single personal loan with a fixed monthly payment. This method works best if the interest rate on the consolidation loan is lower than the average rate of your current debts.

Which Loans Should You Pay Off First?

When it comes to installment loans, prioritize those with the highest interest rates:

• Personal Loans: With an average APR of 11.48% for a 24-month loan, personal loans should be addressed after credit card debt but before other types of loans.
• Student Loans: Focus on private student loans first, as they often have higher interest rates and fewer benefits compared to federal loans.
• Car Loans: Car loans typically have lower interest rates than credit cards and personal loans, making them a lower priority for early repayment.
• Mortgages: Mortgages usually have the lowest interest rates and longest terms, so they should be the last priority in your debt payoff plan.

The Bottom Line

Deciding to focus on debt payoff is a significant step toward financial freedom. By prioritizing debts with the highest interest rates, you can save money on interest and free up cash for other financial goals. As you work on paying down your debts, monitor your credit and watch for improvements in your credit scores.

For personalized mortgage services, contact O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your financial journey and achieve your goals.

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