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How to Determine Which Debt to Pay Off First

When managing multiple debts, it’s crucial to prioritize which ones to pay off first. Generally, it’s advisable to tackle credit card debt before loan debt, as credit cards often carry the highest interest rates. By focusing on credit card debt, you can save money on interest and potentially improve your credit score. This is because reducing credit card debt directly impacts your credit utilization, a significant factor in credit scores.

Benefits of Paying Off Credit Card Debt First

Paying off credit card debt first offers several advantages:

• Improved Credit Score: Lowering your credit card debt reduces your credit utilization ratio, which can positively affect your credit score.
• Less Interest to Pay: The longer you hold credit card debt, the more interest you accrue. Paying it off early prevents high interest charges from accumulating.
• Reduced Temptation to Spend: Eliminating credit card debt can help you avoid the temptation to build up debt again. It’s often better to keep the card open but use it sparingly.

How to Pay Off Debt

To start your debt payoff journey, list your current balances, APRs, minimum monthly payments, and due dates. Here are some strategies you can use:

• Debt Avalanche Method: Focus on paying off the debt with the highest APR first while making minimum payments on other debts. Once the highest APR debt is paid off, move to the next highest.
• Debt Snowball Method: Pay off smaller balances first to gain quick wins and build momentum, even if it doesn’t save as much money as the avalanche method.
• Balance Transfer Credit Card: If you have good credit, consider transferring your balances to a card with 0% APR for a promotional period, allowing you to pay off debt interest-free.
• Loan Refinancing: Refinance existing loans to secure a lower interest rate, which can save you money over time.
• Debt Consolidation Loan: Combine multiple debts into a single loan with a fixed monthly payment, ideally at a lower interest rate than your current debts.

Which Loans Should You Pay Off First?

Similar to credit card debt, prioritize loans with the highest interest rates:

• Personal Loans: With an average APR of 11.48%, personal loans should be paid off after credit cards but before other loans.
• Student Loans: Focus on private student loans first, as they often have higher interest rates and fewer benefits compared to federal loans.
• Car Loans: Car loans typically have lower interest rates than credit cards and personal loans, making them a lower priority.
• Mortgages: Mortgages usually have the lowest interest rates and longest terms, so they should be the last priority unless refinancing is beneficial.

The Bottom Line

The most important step is deciding to focus on debt payoff. Start by targeting debts with the highest interest rates, usually credit cards. This strategy helps you save on interest, freeing up cash for other financial goals. While paying down your debts, monitor your credit to see the benefits reflected in your scores.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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