We’d all like to be debt-free, but for most of us that would take a very long time and a lot of discipline. But even while we continue to diligently pay the bills each month, we can change the way we pay off each of our different debts to get closer to living the debt-free dream.
Ask yourself: What does your debt really cost you? Which types of debt may cost the most? Which ones are in your best interest to pay off more quickly?
Thinking about your interest rates and tax implications can help you prioritize.
Pay off your credit cards and auto loans first. These types of debt are likely to have the highest interest rates, and could cost you the most over time.
Pay off your credit cards and car loan in order of highest to lowest interest. Paying off a card with an 18 percent interest rate is like earning an 18 percent return on your investments. You could also try asking for a lower rate. It may actually work if you have a good credit record.
Student loans should come next. It goes without saying that you should at least pay what is due on your student loans each month, but keep in mind that you may be able to deduct up to $2,500 per year in student-loan interest from your taxes. When you’re ready to pay extra on your student loans, pay the highest-rate student loans first.
Tackle your home mortgage and home-equity loans last. Simply making your monthly payments on these loans might not be a bad strategy. If you have a low rate on a fixed mortgage and can steadily make your payments, you might achieve better results by investing the extra money rather than making extra mortgage payments. In addition, you may be able to deduct some of the interest on your mortgage from your taxes.