What Debts to Deal with First: Small or Big Ones

by admin on February 2, 2012

A lot of people who have a variety of debts make the mistake of paying off the small ones first. They do this because, obviously, it is easier for them. It gives them the sense of having gotten at least part of the debt out of the way, albeit the smaller part, with a corresponding sense of relief. It eludes them that larger debts have higher interest rates, sometimes so much higher that they cancel out the smaller debt. In other words, the interest rate compensates the smaller debt in the time you spend paying the latter off. Depressing, isn’t it?

Still, it is hard not to give in to the temptation of eliminating something small, even though it is an illusion. Yet, the divide-and-conquer rule does not apply when it comes to debt. This is why you should focus on the total amount of money you owe, not on the number of outstanding loans

The good news is that Canadians are beginning to make good on their debt, albeit gradually. No big growth in lines of credit, loans and credit cards can be noted on the Canadian market. Obviously they are finding the right tactic, which neglecting high interest rates and total debt amounts is definitely not. This is exactly what banks are doing – increasing rates to make up for the dwindling demand for financial products.

One thing that some people are opting to do is consolidate debt. This means rolling the entire debt into one. There is also a lot banks can do to help their clients deep in debt to get out of it, such as showing them the total interest rate they will have to pay over time. This has proven to have a positive effect on the outstanding debt amount in the long run (The Globe and Mail).

The most important thing to do is come up with a working plan to deal with the debt. If you come into extra money, how do you decide what part of the debt to cover? We have determined that you should not necessarily pay off the smaller debts first, but what if you have several large debts? Start by making a list of them. Look at your bank statements and all kinds of old paperwork having some bearing on your debts. In some cases, you can get a free credit report as well. This will help you work out how much you owe, and to whom. (Money Central).

First, you should look at your unsecured debts. These include credit card debt, personal loans, medical bills, and payday loans. These loans ordinarily have the highest rates precisely because they are unsecured. This means you have offered no collateral as a safeguard. So, it is best to get rid of these ones first. The next step is finding a repayment method (PT Money). The method is the means – that is, start working harder so you can make more money. Get a second, third, fourth job. Do not spend money on things you can do without.

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