Deciding which of your debts to pay down first is a crucial beginning step for individuals ready to get serious about paying down their debt to zero. Getting organized, making a list and identifying exactly which debts need to go sooner rather than later is the key to freeing yourself from debt. It's important to remember that there are essentially two kinds of debts: good debts and bad debts.
A "good debt" (not an oxymoron, by the way) is an invested debt, and one you could potentially earn tax breaks on. Student loan debt and a monthly mortgage are considered "good" because they appreciate in the long run; be it by way of your career or your invested property.
Bad debts, however, have no appreciation value. Credit card debt or even an auto loan are considered bad debts because they have no appreciation value; your credit card debt obviously won't be helpful in the short or long run, and unless you own a classic your car isn't likely to become more valuable in the years to come. It's also worth noting that "bad debts" often carry higher interest rates than "good debts", though that varies based on the credit worthiness of a consumer.
By now you've probably already come to the conclusion that bad debts should ultimately be paid off quicker than good debts, and are precisely the kinds of debts you should prioritize to pay down to zero.
Which bad debt should go first?
Debt issues are common in consumers young and old alike, and has become one of the leading causes of stress according to the U.S. Centers for Disease Control. The easy way for both categories of consumers to get organized is to gather the interest rate information attached to individual credit cards, personal loans or car loans and rank them from most urgent (highest interest rate) to least urgent (lowest interest rate). Odds are, one or more of your cards are at the top of this list if you carry a balance.
Some debt management experts will tell you to pay off the debt with the lowest balance first to get organized. If that's the balance with the highest interest, then great! But if not, the effect of eliminating one debt - especially if it isn't urgent to pay off - is mostly for psychological and organizational purposes, and may not save you the most when it comes to relieving yourself of interest-laden debt over time.
So, stick to the high interest debts when it comes to determining which debts to rid yourself of first.
Tips for paying down your debt
The business of paying down your debt is often easier said than done. It takes strict budgeting, organization and a strong willingness to get out of the red.
The first thing to consider is requesting lower interest rates from your credit card issuers. Believe it or not, simply asking for a lowered APR can work so long as you have a pristine payment history and no record of delinquency. Get in touch with your credit card company to see if your good credit history can net you a lowered payment.
Speaking of good credit, consumers with good-to-excellent credit scores (generally considered to be 700 and above) are often eligible for 0 percent interest credit card offers applied to balance transfers. This gives consumers the opportunity to pay down their debt interest-free for anywhere from anywhere from 6-to-18 months. Just be sure to confirm that the interest-free introductory period applies to balance transfers before applying, and transfer your balance as soon as you receive your new card to take advantage of the entire intro period.
The last tip is to avoid minimum monthly payments as best you can, but to always remember to make payments on each of your cards and loans. One late or defaulted payment can crush your credit score, not to mention potentially disqualify you from the interest-free introductory period on your new card.
Pay down as much as you can per month on your prioritized bad debts, and be sure to make at least the minimum payments on your other debts - if not more - to avoid your debt piling up further.
Going debt-free means getting savvy - and smart - about the current debts you're carrying. Organize your debts from high interest to low, identify which debts are "bad" and which are "good", and consider a spending freeze on unnecessary purchases as you get focused on eliminating debt for good.