While a certain amount of debt is good as far as your credit score is concerned, too much debt is overwhelming and can set your credit score so far back that it’s difficult to recover. It needn’t be the end of the world. However, as sound financial advice suggests, a debt settlement program can bring your debt under control.

The trick is to prioritize your debts in a way that causes you no harm and, ideally, makes more money accessible so you can pay your creditors quickly.

Why is it Important to Pay Off Your Bills and Debts in the Right Order?

Settling debts in the right order does two important things: it saves you time and saves you money, which keeps the debt collectors from your door.

Trying to settle debts in the wrong order can aggravate the situation, increasing the amount you owe your creditors and putting your family at risk.

Generally, your priority debts are rent and car payments because if you fall behind on your rent, you could be evicted, and if you fall behind on your auto loan payments, you could lose your car.

A mortgage, while important, may have negotiable terms. For instance, you could talk to your provider about an interest-only mortgage that has a lower minimum payment than your current monthly payments. You can use the savings to pay off other debts, and when you have breathing room, you can go back to your original mortgage agreement.

A debt counselor can help you prioritize your debts and might even help you with credit negotiations.

Which Debts Should I Deal With First?

There are four commonly used strategies you can use to pay creditors.

  1. Pay the highest interest rate first.
  2. Pay the smallest balance first.
  3. Pay the largest balance first. 
  4. Use a debt consolidation program to pay all your debts in one go.

The first two strategies are the most efficient. The one you choose depends on how much you can afford.

Highest Interest Rate

This approach is called avalanche debt repayment because you start off with the highest interest rate, and once that’s paid, you use the freed-up funds to pay the next highest, and when that’s paid, you have even more money to pay the next highest more quickly, etc.

It gains momentum as it progresses down the list, just like an avalanche, but you ride the avalanche rather than being buried under it.

This approach works well if you have a budget that can be structured to prioritize interest rates. You should also consider the APR (annual percentage rate) rather than just the interest rate. Your debt adviser will help you work it out.

Lowest Balance

This approach works in the opposite way to the avalanche method. It’s called snowball debt repayment because you start with the lowest amount, and when that’s paid, you use the freed-up funds to pay the next lowest, and when that’s paid, you have extra money to pay the next highest more quickly, etc.

Instead of gaining momentum on the way down, you gain momentum on the way up. You build the snowball, rather than being rolled over by it.

This approach works well if your budget is somewhat limited and the lowest amount is the easiest target to reach.

Largest Balance

This is the least common strategy and tends to only be used in situations where the biggest debt is the one that will cause the most harm if left unpaid. It could be for your car, which is one missed payment away from being repossessed. Or it could be part of a promotion that is about to expire; for example, a consolidated balance transfer account with 0% interest.

Your debt settlement advisor will probably recommend that you adopt either the avalanche or snowball method once the largest debts have been crossed off the list.

Debt Consolidation

Debt consolidation is usually only used when other strategies are unsuccessful or unviable.

There are two options. If the bulk of your debt is credit card debt, then a balance transfer account is your best bet. If the type of debt is varied or excessive, then you might need a debt consolidation loan.

The same principle applies to both, and all your outstanding debt is paid off at once via the bank transfer or loan, leaving you with only one manageable payment per month.

Identify Your Priority Debts – Rent, Mortgage, Secured Loans, Utility Bills, Etc.

The National Consumer Law Center (NCLC) has a valuable guide to surviving debt on its website. It places debt into three categories:

  1. High-priority debt
  2. About to become high-priority debt
  3. Low-priority debt

High Priority

These are the debts that will cause the most harm if unpaid, including court judgments like when you’ve been ordered to pay a creditor, criminal justice like fines, auto loans, rent payments, essential utilities such as power and water, and child support.

About to Become a High Priority

You can hold off on these debts for a period of time, but when that period ends, they are high-priority. They include mortgages and other secured loans, property taxes, federal student loans, and IRS tax debt.

Low Priority

These are the debts that aren’t urgent. They’re the debts you can hold off after you’ve spoken with the creditor. It’s important to make arrangements with the creditor so that they understand your situation and don’t just treat you as tardy.

Non-priority debts include medical debt, private student loans, store accounts, and small loans.

Deal With Your Other Debts – Credit Cards, Payday Loans, Etc.

Some low-priority debts can be classified as “other,” for example, unessential utilities like subscription services and high-speed internet. Reducing unessential utilities and other expenses frees up money that you can put toward essential utility payments.

Although credit card debt is unquestionably not a low priority, your debt adviser might need to create a unique strategy for it.

Payday loans are never recommended, but if you have one, you should try to settle the debt as quickly as possible to avoid exorbitant interest rates and falling into a payday loan trap.

Late on Important Payments? Contact Alleviate Financial Solutions for Debt Help

Life happens, and sometimes this means you can’t help but fall behind on priority bills. Alleviate Financial Solutions has debt help experts and financial advisers who can help you with unsecured debts, late car payments, and many other types of debt.

We also provide credit card debt relief services to get you out of an ongoing cycle of credit card debt.

You can be debt-free! For customer support, contact us at our toll-free number at 800-308-2935 at Alleviate Financial Solutions today!