Sequence of Debt Payments

Debt Payment Sequence

In what sequence should credit card debt be paid off?

Obviously you should pay off your high interest loans first. If the higher interest loans are all on one credit card that is ideal. Focus on paying that credit card off. Next, pay off your lower interest rate credit card debt. In this way you end up paying down your total annual interest at a faster pace.

Remember it is not the total dollar amount of interest that you focus your payments on, but the debt with the higher rate of interest.

Be alert when signing up for credit cards to find a credit card company that will allow you to pay your higher interest loans first. Note that some credit card companies will sequence your minimum monthly payments to pay off higher interest rate loans last.

For example if on one credit card you have a $1000 balance transfer loan being paid off at 4.5%. Then you make a cash withdrawal of $500 with an interest rate of 20% and you also have credit card payments on regular purchases at 15%. Often a credit card company will have your monthly minimum payments pay off the lower interest of the balance transfer first, and then next, the debt of the regular purchases with 15% interest, and then finally, the high cash withdrawal debt and interest. So you end up paying the higher interest rate for a longer period of time. This sequence of payoff prolongs your debt payments substantially.

There are credit card companies that allow you to pay off your most expensive higher interest debt first. Two companies that allow this in the UK are Nationwide and Saga cards. This is the most ideal sequence for paying off your debt: pay off your higher interest debt for a shorter amount of time.

What is the best sequence for handling over-bearing debt?

The first thing to do is to see if you can negotiate the debt down, or negotiate the rate of interest on your debt down.

If you own a home or other property you can possibly obtain a debt consolidation loan. In this case all of our debt is consolidated into one loan with your property used as collateral. Once you have received a consolidation loan you then make one payment monthly on all your debt.

You can approach a non profit consumer credit counseling service. In this case you pay then once a month and they in turn pay all your various creditors. They will also be able to negotiate either a lower debt or a lower interest rate on your existing debt. They can also help to give you some guidance on other aspects of your finances. They can arrange to stop the collection calls that are being made to you.

The final resort would be bankruptcy. Bankruptcy will remain on your credit report for up to 10 years. You are required to appear in Federal Court for one or more hearing. You bankruptcy becomes a matter of public record.

Once you have declared bankruptcy you will no longer be able to use an unsecured credit card, but will need to get a secured credit card. This is a credit card that is secured by a cash fund. This fund is held by the creditor and usually covers 100% of the payments you make with the card. Gradually over time the amount you use to secure the card is reduced, based on your card repayment history. In this way your credit rating is gradually built up again.