Options On How To Pay Off Debt | Mortgage

People want to have no debt, but with high interest credit cards, auto loans and other debts, it is hard for many people to pay off their debts without a strategy. It is important to setup a game plan and goals when paying off credit accounts. Ultimately, by paying off your debts, you will have free money per month and will also raise your credit score. Increasing your credit score can affect your ability to get approved for new loans, like home loans, and the rates associated with these loans.

by DavidWhite

People want to be debt free, but with high interest credit cards, car loans and other debts, it is hard for many Americans to pay off their debts without a strategy. It's crucial to setup a financial plan and goals when paying off debts. Ultimately, by paying off your debts, you will have free money per month and will also raise your credit score. Raising your credit score can affect your power to get approved for new loans, like home loans, and the rates associated with these loans.

Setting Up A Strategy

To pay off your debts, you first want to setup a credit strategy. Debts are put into two different categories, revolving debts like credit cards and installment debts like auto loans or mortgages. Revolving debts can have variable rates which can change at any time. Many credit card companies change these rates quickly and sometimes without notice. It is crucial when setting up a credit plan strategy that you know what type of debt you are trying to pay off first. Usually you want to pay off a revolving debt first.

Once you have the accounts divided into the two categories, you when want to put the accounts in a particular order. You can place the order of the accounts by high interest rate to low interest or from high balance to low balance or low balance to high balance. The order you place the accounts is going to be the order that you want to pay off the debt.

For example, most people like to pay off a low balance credit card first because this is much easier to see results now. You could payoff a low balance credit card in two months while a high balance credit card could take more than ten months to payoff.

Start Action of Your Plan

Now that you have your credit cards in order, you need to set your monthly budget. How much are you going to pay per month towards your credit card debt? Once you have that amount, now it is time to begin working on the credit card debt.

With your monthly budget, only pay the minimum balance on all the credit cards except one. Take the rest of your monthly budget and pay the credit card left with however much you have left. For example, if you have five credit cards and have budgeted $1000 per month towards the debt, then you first want to pay the minimum balance on four of the cards. If the minimum payments on these four cards are $400, then you would have $600 left to pay towards the final card. Once that credit card is paid off, you can now begin paying more to the next account on your list.

You will keep this plan into effect until all revolving accounts are paid off.

Since installment loans have a set schedule of payments, it is important to work on revolving debt first. Once the revolving debt has been paid off, then you can begin paying off the installment debt faster.

Keep in mind that the above strategy works well if you do not charge any new debt onto the credit cards.

Alternative Options Like Debt Consolidation

There are other options to paying off debts in a timely manner like a debt consolidation loan. If you own your house, you could even qualify for a cash out home loan and consolidate all debts into one monthly payment. The more accounts that you can combine into one loan, the easier it is to pay off your debts.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

David White is a Sr. Loan Advisor who specializes in assisting clients with home loans. David focuses in cash out home loans and also understands how credit works. He has over twelve years experience in the Loan and credit industry. Also published at Options On How To Pay Off Debt.