Tackling Debt

There are a couple of things essential to keeping your credit score solid while you’re prioritizing cash flow and debt payments. One is to make minimum payments by the payment due date on all credit cards and loans. An easy way to make sure this happens is to set up minimum payments for automatic debit from your bank account. That doesn’t prohibit you from paying an additional payment in any month. The other is, don’t cancel a credit card with an outstanding balance. Failure to do either of these will have a negative impact on your credit score.

The next steps in reducing your debt involve setting priorities for your debt. For most of consumers, credit card balances are the ones that cause the most problems. Ideally, stop using cards while paying them down. If you tend to make impulsive purchases with your cards, leave them at home and don’t have the credit card information needed for online purchases easily accessible. An old trick to force thinking through use of a credit card is to put the card in a bowl of water and put the bowl in the freezer. If you chip the card out, you might damage it and if you microwave it, the card can melt.

Make goals of how much you can pay on your credit cards. Some say that paying a small credit card completely off is a good first goal. While the most cost efficient way to prioritize payments is to pay the most on the card with the highest interest rate. But there is a sense of accomplishment from paying off a small card and it simplifies how many payments to keep track of. Generally, you should pay the minimum payments on all cards and use the rest of your monthly card payment budget on the card with the highest rate. Once that card is paid off, start applying your extra payment amount to the card with the next highest rate. Eventually, you’ll be down to one card and can make one big payment until that card is paid in full.

Generally, you don’t need to pay additional payments on “good debt”. This is usually anything that might have tax deductible interest – your mortgage, home equity loans, and student loans. These debts typically have low interest rates and the tax benefit makes those debts less urgent. Also, if you have vehicle loans that aren’t too large, with reasonable interest rates, those can be paid according to their terms. Also, don’t buy another new car as soon as you get your loan paid off. You can put the amount you were paying toward that loan into savings. Continuing to save while paying down debt is important, so work for a balance between saving and debt reduction.  

-Linda Leitz