There are all kinds of debt. Here we are going to focus on two of the most common ones: credit cards and medical. College loan debt is really its own post. But before we get to that, lets pull out your credit report, with the handy list of debt.
If you have pages and pages of debt listed, it can be overwhelming on where to start. Let's simplify. For each debt listed, write down the following: Debtor Name, pay off amount, due date, minimum payment, interest paid, date debt incurred. Here's an example:
There are 3 strategies to pay off debt. Your circumstances will determine which strategy will work best for you. There is no right or wrong here. This is more cooking (to taste) and less baking (follow directions).
1. Pay off Debt by Interest Rate (highest first)
This works great if you are the kind of person that is horrified by the amount of interest you are paying. (Those $100 pair of shoes now cost you $250 after interest and penalties). Implementing this strategy will save you money in the long run by paying off the highest interest first. Once its paid off, take that money and put it towards your next highest interest rate. Continue to snowball payment until all debt is gone. BONUS: Take the money that was going towards debt and set up a direct deposit to build an emergency fund.
2. Pay off Debt by Payoff Amount (smallest first)
If you have pages and pages of debt, sort both medical and credit card together. Paying the smallest amounts off first is a quick way to start knocking things off your credit report and raising your credit score. Its also a feel good to see that the list is shrinking.
3. Pay off Debt by Accrued On (newest first)
This strategy I reserve for people that have pages and pages of medical debt spanning over several years. Sort the medical by Accrued on (newest first). The reason is that anything 7 years or older will eventually fall off you credit report. The medical practice takes it as a loss and writes it off on their taxes.
I AM NOT SAYING DONT PAY YOUR DOCTOR. You work and expect to get paid, doctors are no different. All I am saying is that if you find yourself in this position, be strategic with the money you have.
You may even want to call the doctor and work out a payment plan that works for both of you. Just another idea to think on.
No matter what strategy you pick and implement, remember:
a) continue to pay the minimum on all debt (do not incur penalties).
b) pay off your debt as quickly as possible. (should be your #1 priority).
c) keep your budget updated (track where your money is going.)
d) when you are debt free, mostly importantly, treat yourself. Celebrate! Doesn't have to be big, just a little something to reward the hard work.
Which strategy are you going to use?
Leave me a message in the comments below and good luck, thought I suspect you wont need it. 😉