Debt Decisions

So, you’ve set an intention to get yourself out of debt. Noble, my friend. Studies have shown that the average American has over $10,000 in debt, most of which is credit-card debt. Yikes. But then you’re staring at your pile of bills, or your Mint.com account, and wondering — where do I start? Which debt do I tackle first? Here are some simple tips that might help you decide which bill to start with first.

Start with the credit.  If you have a credit card with an outstanding balance (or, if you’re like most Americans, multiple credit cards with outstanding balances), this is the obvious place to start. According to creditcards.com, the average interest rate on credit cards with outstanding balances is just shy of 13%. Unless you have some very unusual debt out there, I am almost positive nothing else you owe has that much interest accruing as you read this article. Start there. And while you’re at it, pick out one card and cut the rest up. Make sure you charge on that card only what you can pay off each month. If you find that too challenging, cut that card up too. You can buy everything you need with a debit card. I promise.  Frequent-flyer miles are sweet and all, but not when you’re $10,000 in debt.

Then think taxes.  When you have finished paying off your credit cards, next you should evaluate the tax-deductibility of your remaining debt.  Your home mortgage interest is deductible, as is your student-loan interest (for most people).  Your car loan interest?  Not tax-deductible.  If you need a tax break, I recommend focusing on paying off your non-deductible debt first, to extend the repayment of deductible interest as long as possible.

But double-check the fine print.  I believe it’s fairly rare these days, but it is possible that your car loan or home equity loan has a penalty for early payoff. To find out, just pick up the phone and call your bank. Ask what the current payoff amount is, and if there are any penalties associated with that amount.  Easy-peasy.

Stay the course.  Paying off debt, like accomplishing anything monumental, is hard work.  You will be tempted to say “screw it” and buy yourself a brand new TV or an expensive purse.  Don’t.  The feeling you get when you are paid in full is much better than the fleeting feeling of buying something cool, followed by the sinking sensation of “how am I going to pay for this?”  You can do it!