Financial Literacy Debt Series: Prioritize Your Debt

by Allacyn - Apr 11, 2011


Prioritize your debt by either the shortest to longest maturity (shortest to longest debt period), smallest to largest debt or the highest to lowest interest rate. Don’t just apply extra money to your debt randomly, have a plan and make sure you stick to it. Most people, when they decide to create a plan to pay down debt, decide to go after the debt that has the highest interest rate or the debt that has the smallest balance, both of these are good options, but in many cases the debt with the shortest to longest maturity might save you the most money.

Maturity is the shortest to longest debt period, so an auto loan would have a shorter debt period than a home loan. This can be the best option to paying off debt faster because it will save you a lot of interest over time. You would pay off the auto loan faster and be able to apply that money toward your home loan.

Paying off debt based on the smallest to largest debt is also another good option. You will pay this off faster and again be able to apply that money toward your next payment. Every time you get rid of a debt payment you will have more money to put toward the next payment. Although this is enticing and you might think that this is obviously the best option it is important to remember the other two options.

Going after the debt with the highest interest rate is another good option because in the long run it will save you more interest. It makes sense to want to pay off a credit card with a 20% interest rate before a credit card with a 0% interest rate because it will save you money. This again might seem like the obvious choice, but it is important to consider the others.

All three of these options are great starts to getting out of debt. To find out what is the best way for you to get out of debt the quickest consider using a software that will show you all three of these options and the amount of time each one will take to get you debt free. LearnKey’s My Money Plan software has a “Get Out of Debt Report” that will show you what is the best way to get out of debt fast.

For all of LearnKey’s Financial Literacy Month resources, visit learnkey.com/financiallitmonth



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