For all of you struggling with bills, it can be very overwhelming if you’re short on cash to know which debt you should pay off first. Do you pay your car payment? your mortgage? your credit card bill? One of the leading finance experts in the country, Suze Orman, prioritizes the order in which you should pay down debt if money is tight. The video of her Debt Loyalty List can be found here.
1. Any debt owed to the IRS. If you have tax payments due or past due, it’s best to pay them first. A lot of you may not agree with this. However, the IRS has legal authority to seize your accounts and possessions at any time. While a bank would take time to legally go through the proceedings to foreclose on your house, the IRS can take what they want when they want. Be done with them first.
2. Student loan debt. The reason this is so high up on the list is because this debt can can not disappear in a bankruptcy filing. Even if you ask for a delay, the interest will continue to add up. And unpaid student loans can take money out of your wages if you’re behind.
3. Personal debt. Suze recommends that any debt owed to friends or family be paid off next. While this debt might not come with an interest rate, she says that most people who loan you money do so because they trust you to pay it back. It can negatively affect a relationship. And Suze’s motto is “People, then money, then things.”
4. Mortgage debt. So this does come up higher on the list than a credit card. While it can take time for the bank to literally have you removed from your home, once you miss that first payment, the process starts. You can always try to refinance your home or apply for a loan modification. Be aware that if you apply for a loan modification and you’re under a temporary modification where you’re paying less each month, the bank can require all that money you saved be paid back if your modification isn’t approved.
5. Car loan debt. Suze has this one above credit cards because most people still need transportation to get to their job to continue to make more money. If you don’t have a car to work, you’re in bigger trouble than not paying a credit card.
6. Credit card debt. Since credit card debt is unsecured (meaning that if you don’t pay it, they can’t come in and seize your home, your car, etc.), it’s best to pay this one last. So by no means does it make sense to take a loan out of your 401K or against your IRA to pay this down. That money is protected from bankruptcy if it comes to that. Also, be aware that you can contact your credit card companies to try to negotiate interest rates or have them forgive debt amounts. In terms of which credit card of many to pay off first, always go with the one with the highest interest rate.
What do you think of her order? Do you agree or would you change it? I’d love to hear your thoughts. Please leave me a comment or visit me online.