It’s common for indebted consumers to hold multiple balances with various creditors. In such a situation, it’s fair to wonder which debt you should prioritize. Here are the basic steps that you should follow:
- Stop the Bleeding: This step is crucial, as it includes two important components. First, it’s important to curtail all unnecessary spending in order to devote as much financial firepower as possible to your debt situation. Second, you need to get caught up on minimum payments in order to mitigate the credit score damage that comes with being classified as delinquent.
- Attempt to Lower Your Interest Rates: Whether through a balance transfer, debt consolidation or a debt management plan, it’s important that you at least try to minimize the finance charges that you pay and thereby ease your path to debt freedom.
- Build an Emergency Fund: Without an emergency fund of at least a couple months’ take-home, even if you pay off all of your balances you’ll only be a lay off or market crash away from ending up right back where you started – mired in debt.
- Pay Off Your Highest-Rate Balances First: Some people will recommend focusing on your smallest balances, but getting rid of your most expensive debt first will save you both money and time.
- Explore Other Debt Solutions (If Necessary): If scrimping and saving aren’t enough to get you out of the hole, you may need to look into other options like debt settlement or even bankruptcy.
Now that you know the general roadmap to debt freedom, let’s take a closer look at each of these objectives. Afterward, make sure to check out our Ask The Experts Section for additional insights into how to get out of debt and stay out for good.