Personal Finance – Prioritizing Debt Repayments

Your essential living expenses belong at the top of your “Bills to Pay” list, including putting bread on your table, keeping a roof over your head, keeping your utilities on, and gassing up your car if you need it to earn a living. However, make sure that you have reduced those expenses as much as you possibly can.

Secured debts: Your secured debts also belong at the top of the list of things to pay. Keep reading if you aren’t sure what a secured debt is. Certain unsecured debts: Some of your unsecured debts should take priority over others.

Distinguishing between secured and unsecured debt

A secured debt is a debt that you collateralized with an asset that you own. (The asset is often referred to as your collateral.) When you collateralize a debt, the lender puts a lien on that asset, which gives the lender the legal right to take the asset if you fall behind on your payments. For example, if you have a mortgage loan, your lender has a lien on your home. If you have a car loan, the lender has a lien on your vehicle.

A lot of your debt, like credit card debt, is probably unsecured, which means that the creditors do not have liens on any of your assets. If you don’t pay an unsecured debt, the creditor will try to get you to pay up. If you don’t, the creditor may bring a debt collector on board to try to get your money.

If you still don’t pay, the creditor must sue you to get the court’s permission to try to collect what you owe. The creditor can ask the court for permission to seize one of your assets. Put a lien on an asset so you can’t borrow against it or sell it without paying your debt.

Examining a Budget Surplus

If your monthly spending and income comparison shows that you have money left over each month, don’t break out the champagne just yet. You may have a surplus because you’re not paying some of your bills or you’re meeting some of your obligations by using credit cards. If this is the case, you must still reduce your spending so your income covers all your bills and living expenses each month.

A key aspect of getting out of debt is not using your credit cards. We certainly understand that sometimes you may have to use a credit card to pay for a financial emergency if you have no extra money in your budget and you have nothing in savings. But you should resolve to pay off the amount you charge as quickly as possible the next month, if possible. And you should try not to charge anything more until you’ve wiped out the new credit card debt.

You may also have a surplus because you’re paying only the minimum due on your outstanding credit card balances each month. You’ll never get out of debt that way! If you have any surplus in your budget, use it to accelerate the rate at which you pay off the balances, starting with the highest-rate card.

Even if you can cover your monthly obligations without using credit cards and while paying more than the minimum due on your card balances, don’t assume that you shouldn’t reduce your spending.

Cut back where you can, and use that additional money to pay off your debts as fast as you can, starting with the debt that has the highest interest rate. After you’ve paid off that one, focus on paying off the debt with the next-highest rate of interest, and so on. When you’ve paid down your high interest debts, use your surplus to start building up your savings.

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