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How to Pay Off Your Debt: Prioritize Your Spending Needs and Your Debt Payments

Written by Mechel Glass on February 14, 2011 in Credit  |   No comments

How to Pay Off Your Debt: Prioritize Your Spending Needs and Your Debt Payments CredAbility Guest Post from Mechel Glass One of the most common questions we receive at CredAbility is “How do I go about paying off my debt?” People who call us for…

How to Pay Off Your Debt: Prioritize Your Spending Needs and Your Debt Payments
CredAbility Guest Post from Mechel Glass

One of the most common questions we receive at CredAbility is “How do I go about paying off my debt?” People who call us for basic budget counseling have an average of more than $22,000 in credit card debt. They want to pay down their debt but are often overwhelmed and don’t know where to start. We help by showing them which of their debts should receive top priority.

Here’s what we advise, no matter what your situation: Always make your mortgage payment your top priority. You and your family need a safe place to live, and even though the foreclosure process is taking longer now than ever, missing mortgage payments will eventually catch up with you.
After making your mortgage or rent payment, pay those expenses that are necessary for daily living. Make sure to pay all of your utilities, including electricity, gas, and water and sewer, and your taxes. Make adequate room in your budget for food, but avoid eating at restaurants and buying coffee at $3 a cup. That’s wasting money, especially if you’re already on a tight budget.
After food and utilities, make certain that you pay your monthly insurance premiums for health, car, and home. Keep your insurance payments up to date and be sure you have enough coverage in case you ever need to make a claim. Also, keep enough money in your savings account to handle any expenses not covered by your policy’s deductible. You do have options with car insurance, because you can buy less collision coverage for an older car.
Now it’s time to tackle the remaining expenses—items that aren’t necessary for daily living, plus your credit card bills. Itemize every expense that isn’t critical, such as cable television, health club memberships, and expensive pet food. If you can’t make your mortgage payment, buy enough food, or pay utilities and insurance, get rid of the cable and the club memberships and buy less expensive pet food.
Next, look at what we call your “technology” costs, which include your telephone and Internet service bills. If you have a cell phone and a land line, decide which one you need the most and cancel the other service. If your family has several cell phones, decide if you need them all. Finally, if keeping a land line is necessary, investigate Internet services that will allow you to make local and long-distance calls for a low annual fee.
Now that you’ve eliminated unneeded expenses, you can finally tackle your credit card debt. There is more than one way to methodically reduce this debt. You have already learned a few strategies, such as paying down debt on the highest interest rate first, which is recommended by Equifax Personal Finance Bloggers Ilyce Glink and David Bach. Here’s another strategy you can consider.

If you have multiple credit cards, start making large monthly payments on the balance of the card with the least amount of debt—while also making the minimum payments on all the others.

The objective is to pay off the debt on the first card as quickly as possible. Once the first card is paid off, start paying down the balances on the remaining credit cards. You can accelerate this process by using tax refunds or bonuses.
If your total credit card debt is very high, you simply may not have enough income to pay off the debt on your own. If that’s the case, a nonprofit credit counseling agency can work with your creditors on your behalf and set you up with a debt-management plan (DMP), a long-term plan to pay off your credit card debt. For a small monthly fee, nonprofit credit counseling agencies may be able to negotiate lower interest rates with your credit card companies, thereby lowering your monthly payments.
If you’ve tried every other method on your own and haven’t been able to pay down your debt, it may make sense to consider a DMP. For more information on DMPs, visit www.CredAbility.org.

Mechel Glass is the Director of Education for CredAbility. In this position, she is responsible for developing the curriculum and educational materials for online classes including webinars, podcasts, videos and listen-on-demand classes. She is responsible for managing the agency’s community outreach programs and staff, including financial education specialists in a 14-county area throughout metro Atlanta and north Georgia. She also manages the development and reporting of education partnerships online for the agency.

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