Mighty Bargain Hunter

Advice on reducing your debt

March 12th, 2006 | by mbhunter |

This article rose to the personal finance page on Money.com:

Top things to know about controlling your debt

The folks at Money have a Money 101 course online with a good series of articles covering many areas of personal finance.

Five of the suggestions specifically relate to debt reduction in this article.  Here they are, along with my comments:

• Pay off your highest-rate debts first.  Then tackle the next-highest rate.  By “tackle” this means throwing all money above and beyond your combined minimum payments at the highest-rate debt.  This will save the most money in interest payments.  However, if you need some tangible signs of progress, you may also consider paying off the debt with the lowest balance first.  That way, you’re pay one of the debts off more quickly.
• Don’t fall into the minimum trap.  Excellent advice — you should aim to pay, at the very least, more than the minimum payment on your cards.  Ideally, of course, you should pay them off in full when they’re due.
• Watch where you borrow.  As in your tax-advantaged retirement account.  Dipping into these accounts early — even for a cause as noble as debt reduction — carries a lot of extra costs, including lost interest, penalties, and inability to pay the withdrawn amount back into the account (you can’t “catch up”).
• Don’t be so quick to pay down your mortgage.  In comparison to other forms of debt, this can be true.  If you have credit card debt, then it’s almost always a great idea to pay this off first before paying down your mortgage.  Some would argue that fixed rate mortgage debt is great to have as an inflation hedge.  (I tend to fall somewhere in between here:  I’m paying off my mortgage a little faster than my regular payments.)
• Get help as soon as you need it.  As the article warns, though, make sure it’s good help.