9 Steps To Get Out Of Debt – Part 6

Step 6 – Paying Off Your Debt
Hopefully by now you are committed to paying off your debt and
you have freed up at least a little extra income to help you do
it Now, it’s time to start paying it off The first step is
determining which debt to pay off first Most people are tempted
to try to pay off their largest debt first, but this usually
isn’t the right thing to do
Get out your list of debts again and see which one has the
highest interest rate If you still have credit cards remaining
after the refinance step, it will most likely be them It is
possible that your mortgage or student loans are the highest
debt However, these debts are tax-deductible, so if this is the
case and you itemize your tax dedications be sure to keep this
in mind The way to do this is subtract the interest rate times
your tax bracket from the interest rate For example, if you
have a loan at 8% interest and you’re in the 28% tax bracket,
your effective interest rate would be 8 – (8 X 28) or 8 – 224
= 576%
If you have more than one debt at the same rate, pay off the
smaller one first Although it makes no actual difference on how
soon you will get out of debt or how much you will pay, it will
help you see results sooner and encourage you to keep at it
The next step obviously is to start making the extra payments on
this debt Be sure not to neglect paying at least the minimum on
the other debts while you do this, though Missing a payment can
cause you to rack up late payment fees or your interest rate to
skyrocket, making repaying your debt even more difficult As you
make extra payments on credit cards and other revolving lines of
credit they will typically reduce your minimum monthly payment
Do not lower the amount you are paying! This should be an
encouraging sign to you As your minimum monthly payment goes
down, so is the amount of interest you are being charged By
keeping the same monthly payment you are getting the principal
paid off much quicker
It may take a few months or possibly a few years, but if you
keep at it you’ll eventually get this first debt paid off This
isn’t the time to take it easy though, here’s what you’ll need
to do next First, close the account you just paid off if it’s a
revolving line of credit, so you won’t be tempted to charge it
back up Next, determine which debt has the next highest
interest; this will be the next account you pay off Now,
continue to make the same monthly payment you were before, but
add to it the money you were paying on the account you just paid
off, including the extra payments you were making towards that
one For example say your first debt was for $100 per month and
you were paying an extra $50 for $150 total each month, and your
second debt costs you $75 per month You will now be paying $100
+ $50 + 75 on this second debt, or $225 That’s three times what
your monthly payment was before, which will help you to get it
paid off much sooner
Once you get your second debt paid off, repeat this pattern
again Apply the amount you were paying to your first debt, your
second debt and your third debt all to your third debt to get it
paid off even sooner As you continue to do this, the debt
repayment will rapidly pick up pace I highly recommend
continuing to do this until you are completely debt free,
including cars and mortgages, not just credit cards
If you tried to refinance some of the debt in an earlier step
but were unable to get approved for a loan, you may want to look
into it again after paying off a few debts Your debt-to-income
ratio is now lower and you have built up a good history of
paying off your debt, both of which will help your credit score
and make it possible to get approved for loans you weren’t able
to before However, be sure to also re-evaluate if it’s still in
your best interest to refinance, now that your debt has been
reduced and you are making higher payments

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