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12/10/14

Debt downer: Paying off debt a must, but do you know where to start?

Having what is deemed an insurmountable amount of debt can be equal parts frustration and daunting. Quite simply, the average person might have what they consider a mountain of debt, but they're unsure of exactly where to begin.
That isn't an uncommon sentiment with those struggling with debt in the form of school loans, credit card or any money that has been borrowed and still is in the midst of being paid back. Because debt can be mentally and, to a degree, physically crippling, you can easily find yourself combing through stacks of credit card receipts and bills and wondering two things: how did you get here, and what should you tackle first?
The former question is one that is going to take days, weeks or even months of soul searching, although the more adept and competent spenders realistically know exactly how they got themselves in this predicament but just aren't ready to admit that the onus falls squarely on their shoulders.
What you can work on moving forward is attempting to pull yourself out of this dilemma by assessing where you are and starting to itemize the debt in order of importance.
How do you rank debt in that regard?

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You want to start with the highest interest rates first and pay close attention to the minimum payment requirements on this debt, most likely credit cards. More of your auto, home and school loans come with a lower interest rate, which means they'll be "lifers" as far as paying them monthly for the foreseeable future.
Instead, take a look at the Visa bill or master the Mastercard statement to the point that you look over your entire budget and reallocate additional income to paying double, if possible, the minimum payment on a Visa bill that carries a 10% interest rate, rather than turning your attention to a school loan that is at 2%.
Furthermore, department store credit cards (think Target, Lowes, etc.) have wildly ridiculous rates that tip the scales sometimes at 30% or more. They'll entice consumers to use these store charge cards based on promotions of 0% interest for a certain amount of months, not specifying a lot of the times that the interest is being logged and if it isn't paid on time after that promotional period, you owe the back interest as well.
Consolidation isn't always the answer, either. If you're going to do something like that, try looking into a credit union through your place of employment for two reasons: you can have the payment deducted on time (good for your credit score) and the interest rates are usually lower than you can get by opening another card.
Companies that specialize in consolidation should be researched thoroughly, particularly checking on the monthly service fee that goes along with the plan. Some charge as little as $50 and others in the hundreds. If you fall into the category of the latter, you may end up spending more per month on a consolidation plan with the fees that you were paying with those higher interest rates.
Hitting your debt head on can be tricky and difficult if you don't know what to look for; most consumers end up paying the minimum and forgetting about the payment the moment it hits the mail or you click "send" on the computer.
That exercise in futility is only going to cost you three or four times what you actually borrowed over the course of the loan, so spending the time now analyzing your debt, accepting it and paying it off the right way makes more financial sense.

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