Effective Debt Management Requires Prioritization

Facing debt can be a daunting task for people that have become burdened with high debt amounts, high monthly payments, and high finance costs. Thinking of high debt amounts in totality can add to the emotional burden of the debt. The best way to fight debt is to develop better spending habits to avoid digging a deeper hole, and to deal with the current debt by go after the most burdensome debt first.

Combating debt is similar to rolling a snowball down a hill, or knocking over dominos. The process begins slowly, but momentum builds as the debtor begins to knock out the most impacting forms of debt. The key for the borrower is to understand what debt causes the greatest disadvantages. This is the debt that should be paid off first.

There are several factors that should be taken into account when prioritizing debt. The most important debts to manage are those that could potentially lead to loss of valued property. Therefore, mortgage debt and homeowner secured loans should always be the main focus. Debts that are secured by property and expose the borrower's home to loss must be managed.

Ideally, borrowers can manage their secured debt and still have enough income and resources to meet and exceed monthly demands of revolving debt. What should dictate the order of importance for paying off unsecured debt? Again, there are several factors to consider, but there are a few key ones.

Money is the source of the greatest vice, and that nation which is most rich, is most wicked.

First, interest rates are a consideration. The higher interest rate balances accrue finance charges at a higher cost than lower interest rate balances. Over time, the optimal debt management plan reduces the total cost of debt repayment. Plus, by paying off the more expensive debt first, the borrower reduces the ongoing and overall debt costs.

Monthly repayment costs offer another consideration with debt payment prioritizing. Credit cards and loans that have higher monthly payments are more debilitating and have the greatest budgetary restraints. Thus, with credit cards that have comparable interest rates, the card that has the highest monthly repayment costs should be targeted first for early payoff. Once the more expensive cards are repaid, the new available resources can be applied to the next most urgent debt. This is where the domino effect comes into the picture.

Additionally, some borrowers prefer to work with fewer creditors to reduce the emotional burden of debt. Therefore, it is sometimes practical to payoff low balance debt simply to reduce the total number of creditor obligations.