Effective Debt Prioritization Techniques

Getting rid of credit card debt once and for all can be extremely challenging, especially when there are multiple outstanding debts. Deciding which debt to pay off first is perhaps the most difficult aspect of repairing bad credit, because each debt seems to be just as important as the next.

Fortunately, there are techniques that can be used to simplify the debt management process. The following effective debt prioritization techniques can be used by anyone with more than one outstanding debt.

Repay the Smallest Debt First

One method used to eliminate several debts quickly is to repay the smallest debt first. Studies have shown that the human mind judges progress based on completed tasks rather than the actual amount of work done. In other words, getting rid of a small debt of several hundred dollars will give the impression that more has been done than if one were to repay $1000 out of a $2000 loan, simply because the latter debt still exists. Building momentum and feeling as if things are being accomplished is the best way to make progress in any situation, especially an uphill debt battle.

Repay the Highest Interest Rate First

An alternative technique that can be used to eliminate multiple debts quickly is to repay the debt with the highest interest rate first. Repaying the high interest rate first will prevent excessive interest charges from accumulating. Interest is based on time, which means that debts that remain unpaid for longer periods of time will ultimately cost more to repay. Getting rid of the high interest debts first is a great way to minimize the total amount of debt that needs to be repaid in the long term.

Creating Prioritize Lists

One of the best ways to prioritize credit card debt is to create lists that classify each debt into different categories. By separating the importance and urgency of the debts it is possible to repay the total amount owed in much less time, with much less effort.  Start by separating the debts into one of two categories – secured and unsecured. Secured loans should be paid first because they are secured with some form of collateral which can be seized if the loan is defaulted on. Losing an asset or property as a result of a defaulted loan is a terrible way to add insult to injury. Unsecured debts should be paid last in most cases, simply because the risk of loss is much less. Since credit cards are unsecured debts, it is best to consider repaying other loans first, before prioritizing credit card debt.