Debt Consolidation Advice – Assigning Debtor Priorities to Pay Off Your Debts In Record Time

June 30, 2011 by  Filed under: Debt 

Looking for debt consolidation advice? Join the club. There are literally thousands of people who find themselves up to their eyes in debt. How did so many people get in trouble all at the same time?

The answer is found in the recession. While some people lost homes and jobs, others were able to hang on by the skin of their teeth. Some saw soaring costs from adjustable rate mortgages while others lost their jobs or had their hours cut. All in all, it added to stretched budgets.

At the same time, credit card reform went through cutting fees credit card companies could charge their customers. When faced with cuts, the banks dramatically raised interest rates. Most credit cards are now in the range of 25% interest! This means if you owe your credit card $1000, you will pay over $200 this year in interest. If you pay only the minimum monthly payment, you will end up owing much more than you did at the beginning of the year.

That’s the key to prioritizing your debts. Pick the ones with the highest interest rates first. The reason is obvious. It will be harder to get them paid off because the high interest rate means most of your payment goes to paying interest, not paying down the principle.

It should be noted that this is exactly the opposite strategy for improving your credit scores. The credit scoring algorithm looks at the percentage of debt versus the total credit line extended. A credit counselor will tell you to try to pay all your bills down uniformly. This means if you have 4 credit cards, you try to pay the balances equally. This will show a consistent reduction of your overall debt.

By contrast, paying off one card faster than the others does very little to paid to other cards makes it look like you are in danger of defaulting on the cards whose balance remains high. You see, the credit card algorithm tries to estimate the chances of default. As a credit balance gets closer to the limit, it appears it is only a matter of time before you exceed the limit. This is what normally happens before people default on their obligations and eventually declare bankruptcy. Most people rely on credit card lines of credit when they become strapped to make house and car payments.

Don’t worry, the smartest thing to do is to pay the high interest cards first. As you eliminate one payment, you’ll have more money left to pay the rest! You may even want to transfer balances to low interest rate cards to pay down the balance on high interest rate cards. This will allow more of your payment to be applied to the principle balance and not be applied to the interest payment.

One of the more interesting things about credit card reform is the banks must now list the amount of time it will take to pay off your balance if you make only the minimum payment. This is a real eye-opener. In some cases, it will take over 13 years to pay off a balance on a high interest rate card. You simply must pay off these high rate cards first if you ever want to regain control of your financial life.

Consolidating debt is becoming a national obsession. To find more tips and tricks to getting your life back, please go to debt consolidation advice

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