Which Debt to Pay First

Whether your debt lies in your mortgage, credit cards, or loans, learn which you should pay down first.

Whether your debt lies in your mortgage, credit cards, or loans, learn which you should pay down first.

“Debt” tends to have a dirty connotation attached to it, and for good reason. Americans have amassed trillions of dollars in debts attached to credit cards, mortgages, student loans and other loans. But the reality is we’ll spend most of our lives owing others money.

Debt can cause stress and anxiety that affects our everyday lives. How can we get rid of the debt we have?

Putnam Bank has put together this guide for paying down your debt, whether you want to pay the least amount of interest over time, need a quick win or want to improve your FICO credit score as quickly as possible.

Highest debt balance or highest interest rate?

When looking at your debts, it’s easy to see the largest balance and start there. But it may be more beneficial to start with the debt that has the highest interest. By ordering your debts from highest to lowest interest rate, you reduce the amount of interest you’ll pay over the life of the loans. Just be sure to keep paying the minimum amount for your other loans.

 

If you need some motivation- the Snowball Method

Taking on your debt can be intimidating. If you need some encouragement, go with the Snowball method:

  • Order your debts from lowest balance to highest balance
  • Pay down the smallest debt while paying the minimum on the other debts

This sets you up with a quick win, which can relieve some of the stress and anxiety of living with debt.

 

What if I’m planning on taking out a loan soon?

If you’re planning on applying for financing of any kind, you need to focus on paying down debt that impacts your FICO credit score the most.

 

  • Revolving debt- revolving debt, such as credit cards, has the largest effect on your FICO credit score. Why? It poses the most risk to the lender. Revolving debt is unsecured by an asset, unlike installment debt. Credit card debt also comes with higher interest rates, meaning you pay more over the life of the debt as long as it isn’t fully paid. High credit card debt is also an indicator of higher risk. This means lenders may jack up your interest rates to entice you to pay, or they may reject your application altogether.
  • Installment debt- installment loans come with fixed payments and are tied to an asset, such as a home or car. Because of this, they are seen as less risky for lenders since they can repossess and sell the asset if you don’t pay. While installment debt doesn’t have as big of an impact on your FICO credit score as revolving debt, paying them down is still important to increasing your credit score and living debt-free.

 

You don’t have to let debt own you. By committing to a debt reduction plan, you can rid yourself of crippling debt, improve your credit score and live better.

 

If there is anyway Putnam Bank can help you manage your debt, feel free to call or stop by any of our offices today.

 

Putnam Bank, Member FDIC and Equal Housing Lender