How Should I Pay Off my Debt

Question: Dear Luise: I want to ask a question pertaining to which debt to pay off first. Can you help? B.

Answer: Dear B. There are several different ways that I know of to look at debt reduction.

An initial approach might be to pay off the smallest debts first. Quite often, multiple payments can really add up and the best thing to do it to get them paid off so you have greater resources to tackle the big ones with.

Another way to look at it is the percentage of interest you are paying. The higher your rate…the slower the payoff because you are paying too much in interest and too little on the principle. Paying as much additional as you can on the principle every month is like lowering the interest rate.

There are firms out there that specialize in debt consolidation. They often are able to negotiate with creditors to reduce payments. However, beware, because that will extend the length of the payment schedule and end up costing you more in the long run. The psychology of consolidation usually doesn’t work for the people who have gotten hooked on deficit financing. They don’t really plan to perpetuate their problem, but once they get a breather…they often just use the extra money to incur more debt instead of learning to save. Rationalization is the great enemy in such cases and counseling may be needed to get a clear look at what is going on and why.

Using the support of another person until poor financial habits have been replaced with healthy ones is yet another way to get out of the hole. Sometimes someone near and dear will pay off debts and accept reasonable and, occasionally, interest-free repayment. The problem with such an arrangement is that many times the family member or close friend gets left holding the bag because habits aren’t that easy to break and they don’t have the leverage that outside lenders do. Also, money can be handed over to a sympathetic third party on a regular basis for better management. This resolution, too, has possible problems built into it, namely eventual dependency and/or resentment.

Take a close look at your situation to see if any of these solutions would work for you. The fact that you are looking closely at which debt to pay off first is a strong indication that you are moving in the right direction. Blessings, Luise

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