Paying Off Your Debts

If 2008 has you thinking about your spending and saving habits, you’re not alone. Consumer spending fell nearly eight percent in November as consumers reeled from the impact of job losses, foreclosures, and growing personal debt. With so many challenges, some consumers are unsure of where to start when it comes to resolving their debt problems.

If you’re still able to make payments on your debts, your priorities should include paying off your most expensive debts first. The expense of a debt should be measured by the obligation’s interest rate. Those debts whose interest rates are highest should be addressed first. If you have extra cash, put it against these high-dollar debts.

This strategy works even if the overall amount of high-interest rate debt is small, relative to the other debts you owe. Accelerating payments on tax-deductible debts like mortgages and student loans should be a low priority. First, these debts are likely to have a low, fixed interest rate. Second, their tax deductibility gives them an advantage that your credit card and personal loan debts don’t have. The deductibility of these debts reduces their cost further. Since these low-interest debts cost much less than credit card debts do and also provide you with a tax advantage at the same time, it makes little sense to accelerate these payments if you have other higher-interest, non-deductible debts that could use the extra attention.

Watch your credit card interest rates carefully. If the interest rate on an account suddenly jumps several percentage points, review your payoff priorities and make adjustments accordingly. Always work on eliminating the highest rate debts first to reduce the overall cost of your debts. Once you retire a debt, put the card away and focus on the next highest-interest rate debt. By focusing your debt reduction efforts, you’ll find that your debts will disappear sooner than you think.