Paying off Debts – How to Get Started

Millions of Americans are struggling to pay off their debts. Many have credit cards, student loans, mortgages, personal loans, medical bills, and more, so it’s easy to see how overwhelming it can be to sort out your personal finances. However, this article will help you to start planning how to pay off debts.

paying off debts

[Read: Should You Pay Off Your Mortgage After You Retire]

Regardless of the types of debts that you have or the level of financial difficulties that you are currently facing it’s important to have full knowledge of your monetary situation. Burying your head in the sand will do nothing but make the situation worse, so if you feel like you’re constantly struggling to pay off debts then it’s time to take the bull by the horns and organize your finances.

Step One – Make a List

You may feel that you’re all too aware of what money to owe to which people. But until you list down all of your debts together there’s no way that you can organize paying off debts. This exercise alone will help you see the extent of what action is needed. You may feel better for having done it, or you may feel even more disillusioned and afraid that there’s no way for you to combat your debt. But without this list you can’t get started. Make sure that you include all of the important information for each debt, including:

  • The name of the lender or creditor
  • The amount of money that’s still owing
  • The minimum monthly payments you can make
  • The interest rate

Once the list is done it’s time to look through and decide which debts need to be prioritized. This is difficult to do without some sort of structure, so now let’s look at which debts should be concentrated on.

Step Two – Prioritize

The first thing to do is to mark on the list which of the debts makes you feel the most nervous. Which one do you lie awake at night worrying about? This doesn’t have to be a logical answer, but at the end of the day part of paying off debts is regaining happiness. For example, you may put a mark next to your mortgage because you’re most afraid of losing your house, or you may be more concerned about a personal loan because you don’t want to change the lifestyle that you’re now used to. Remind yourself why you’ve chosen to concentrate on paying off your debts now. What’s made you decide that action needs to be taken?

Secondly, mark on the list the debt that has the smallest balance and the debt that has the highest interest rate. These should be a priority depending on your individual circumstances. For example, if it’s the sheer number of different people and organizations that you owe money to that stresses you out the most, pay off the debt with the smallest balance so that it’s out of your hair for good. Once you start making the list smaller the momentum will hopefully build and build. With regards to the debt with the highest interest rate, regardless of the size of the original loan, it makes sense to pay this off sooner rather than later. The longer you leave this debt alone the more empty interest you’ll be paying to the bank or creditor. Also look at switching loans or consolidating them into one monthly loan so that your interest rates are reduced. Your bank or credit union can help out here.

Step Three – Make your decision

There’s no point in confronting your debts if you’re not going to do anything about them. You may think that you’ve been doing the right thing in spreading out your finances evenly so that every creditor gets some money back. This will get you nowhere as you’ll hardly make any dent at all on your overall debts. And tell yourself this – you’re not here to make friends with the creditors and keep them all happy. When looking at paying off debts, if you have to pick one over the other then do it, especially if it makes you feel better about your financial situation.

If it comes to it, be honest with yourself and decide which things you can live without in your day-to-day life. Could you manage with a smaller car, for example? Thinking like this can help you to choose which debts are the most important to you.

[Read: Ten Unfamiliar Ways to Help Pay down Medical Bills]

Depending on the type of debt, you may be able to ask for an extension period or relaxation period so that your payments are either reduced or suspended for a short period. Not paying off student loans can have a dramatic effect on your day-to-day life, but many people are unaware of the help that is available to them in the form of deferment or forbearance programs, for example. The US Department of Education has a lot of advice on offer for those who need assistance.