What to Pay First When in Debt

By Contributing Writer

  • Overview

    Landing into deep debt can be the most overwhelming and stressful event in your life. When your debt exceeds your income, it becomes necessary to prioritize expenses. With so many bills piling up, creditors calling and sending threatening letters, it's hard to know what to do first. Many people just pay whoever screams the loudest, but this is not a savvy financial strategy.
    • Step 1

      Pay household bills first. These are the expenses that are the most essential to your survival. Pay the mortgage or rent first so that you know that, if nothing else, you have a roof over your head. Next, buy groceries. Pay the water and electric after that, then phone. Consider significantly reducing phone and eliminating cable services.
    • Step 2

      Identify the bills with the highest interest rates attached, such as credit cards and personal loans. These also often have the harshest penalties for late payments. These are the bills that you should pay next. You will want to avoid their late fees and possibly an even higher jump in interest rates if you miss a payment deadline. Negotiate with them to lower interest rates and penalties. Pay as much as you can to these creditors every month to get the debt cleared as soon as possible. The minimum payment plan is usually geared to keep you in debt with them forever. Always pay more than the minimum. Even if it's just $10, you'll be ahead.


    • Step 3

      Pay your car payment. While late payments will negatively affect your credit, this is a bill that you can let slide without immediate consequences, unlike getting evicted or having your heat turned off. Typically, you can lapse on payments for two months before repossession becomes an issue. Still, this bill should remain fairly high on your "to pay" list since repossessions are serious black marks on your credit. Losing your car can also create bigger problems such as losing your job because you couldn't make it to work on time.
    • Step 4

      Pay your car insurance. Insurance premiums are another bill that you can let slide a bit in times of serious financial distress. Legally, you must have insurance to drive, but it's usually only a problem if you get pulled over. Thus, keep it a priority but don't ever pick insurance over groceries.
    • Step 5

      Pay the pig. No matter how far into debt you are, you should make a deposit into your savings every month. Even if it's only a few dollars, in the long term, any investment will pay off. Once you are debt free, your savings will be an insurance policy against future debt should you lose your job or experience any other major financial setback.
    • Step 6

      Pay medical bills and student loans. Both can usually be negotiated and often don't count as much against your credit rating. Student loans in particular have many repayment and deferment options. Do what you can to reduce or eliminate these expenses, then pay them as you can.
    • Skill: Moderately Challenging
    • Tip: Everything is negotiable. Ask for rate reductions, deferments o elimination of penalties. Be nice, but don't take no for an answer. If the representative on the line isn't budging, ask for a supervisor.

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