Dear Debt Adviser,
I am married and am responsible for taking care of the finances. Like many others, my husband and I find ourselves trying to get our home loan modified, and I have been working on a budget that we can commit to. Our income suffered greatly this past year and a half, and we are trying to get back on our feet.
I made the mistake of paying mortgages and other debts with credit cards to stay afloat and pretty much exhausted our credit. Now I am working on establishing some control over our credit card debt and am trying to decide which cards to pay down first. Some tell me to pay down the lowest interest rate accounts and others say differently. What should be paid first and how do you feel about companies who help consolidate and work to get a sustainable monthly payment for us?
You are not alone in using credit cards to keep things afloat in these troubled times. But as you are finding out, this course of action is short-lived and has its own problems. On the positive side of things, good for you! I love it when couples work together to get their finances under control rather than just fighting about them. When you are juggling multiple debts at the same time, it's important to keep them all in the air and not let one drop.
So while you have to keep up on all your payments, getting a final answer on your mortgage loan modification and then making sure you can afford your home with your reduced income is your first priority. I would usually recommend paying your mortgage before paying any other obligations, but with the current economic environment and the number of unsuitable mortgages that were made, it just doesn't make sense to keep paying on a mortgage that is not sustainable.
3 tips for paying down debt while keeping your house:
- Keep up with all your payments.
- Be sure you can afford your home.
- Prioritize your repayment plan based on what motivates you.
The method you use to pay off your credit card debt is more of a personal preference, and one way is not any better than another.
I typically advise that you pay off the debt in whatever way provides the most motivation for you. My son Steve and his wife Grace are both CPAs, so they might consider retiring the highest interest debts first as being the right way to go because paying those first saves the most money in interest charges. My wife Barbara, on the other hand, rescues cats, so she might want to neuter the smallest, easiest bills to reduce the number she has to deal with. In other words, your approach has to work for you, not for some well-meaning advice giver.
If you are motivated by seeing an account paid off and being done with that bill, you would pay off the debts with the smallest balances first so you can accomplish paying off an account quickly and stay motivated.
If you get excited at saving money by paying down the accounts that are charging the highest interest rates, you put the most money toward the account with the highest interest rate first. When that account is paid, you can use those funds to move on to the account with the next highest interest rate.
Should the task of paying off your credit card debt prove overwhelming or if you would just like to get an unbiased opinion on how tight your budget is, I endorse speaking with a quality nonprofit credit counseling agency. Its counselors will go over your budget for free and give you all your options. You can find a quality agency by visiting Aiccca.org or Nfcc.org, the Web sites for two groups tied to credit counseling.
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