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Effective Strategies for Managing Debt

Dealing with a significant amount of debt can be overwhelming, and knowing how to prioritize paying it off is crucial. To avoid legal issues, it’s essential to prioritize any tax debt or debt in collections. Beyond that, your approach may depend on your financial situation, objectives, and long-term goals. For instance, you may prioritize paying off a car loan to eliminate car payments or focus on tackling looming credit card debt.

Regardless of your chosen approach, the most important step in paying off your debts is to create a plan and follow through with it. Here are five strategies to help you determine the best path forward:

1. Prioritize Debt With the Highest Interest Rate

Focusing on debt with the highest interest rates can potentially save you more money on interest. Credit card debt often has the highest interest rates, but other accounts, such as payday loans, can also charge very high rates. Review the terms of each account to identify which ones have the highest interest rates.

You can use the debt avalanche method to prioritize high-interest accounts. This method involves making the minimum monthly payment on all accounts except the one with the highest interest rate. Allocate all extra funds to pay down that account faster. Once it’s paid off, apply the money you were using for that account to the one with the next-highest rate, in addition to the minimum payment you’re already making. Repeat this process until all your debt is paid off.

2. Focus on the Debt With the Smallest Balance

While focusing on high-interest debts can maximize your interest savings, it can be challenging to stay motivated if you’re dealing with high balances. The debt snowball method allows you to prioritize your smallest balances, providing quick wins early in the debt payoff process.

This approach works similarly to the debt avalanche method, with one key difference: Instead of focusing on the highest interest rate, you’ll pay down your smallest balances first.

3. Concentrate on Revolving Debts

If you have credit card debt or a line of credit, a high balance could result in a high credit utilization rate, which can damage your credit score. By targeting your revolving debts first, you can lower your utilization rate and help increase your credit score.

Additionally, revolving debts typically have low minimum payments, and making just the minimum payment can severely prolong the payoff period. Tackling these debts first can prevent them from disrupting your debt payoff plan. Moreover, revolving debts often come with variable interest rates, which fluctuate over time. If interest rates are rising, paying down revolving debt first can help minimize the impact on your budget.

4. Consolidate Your Balances

As you pay down your debt, consider whether there’s a way to refinance some of it at a lower interest rate. This may be possible if your credit has improved since you first took out the debt. If you have good credit, you may qualify for a balance transfer credit card with an introductory 0% APR promotion or a debt consolidation loan with a low interest rate.

Check your credit score and research opportunities to consolidate or refinance your high-interest accounts. While this process alone won’t solve your debt problem, it can make it easier to manage, save you money, and help you become debt-free sooner.

5. Evaluate Your Spending Habits

If you’ve accumulated a lot of debt through overspending, assessing and revising your spending habits will have a much greater impact on your long-term financial well-being than simply paying down debt. This can help prevent the same situation from happening again.

For instance, if you have credit card balances, you may decide to stop using your cards while you work to pay down your debt to avoid slowing down the process. Also, review your spending habits and identify areas where you can cut back. Use some of this cash flow to make larger debt payments and accelerate your payoff plan.

Monitor Your Credit as You Pay Down Debt

Regardless of how you decide to tackle your debt, monitoring your credit score throughout the process can help you understand how your efforts impact your credit. You can also learn ways to maintain the progress you make through good credit behaviors.

With Experian’s free credit monitoring service, you’ll get access to your Experian credit report and your FICO® Score powered by Experian data. You’ll also receive real-time alerts every time something on your credit report changes, so you can stay on top of potential problems as they arise.

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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