How should I prioritize my debt?

Q: I just got a job after a long stretch of unemployment, so now I am trying to prioritize my debt. I have student loan, mortgage and credit card debt -- which should I pay first?

A: For one thing, it depends how you mean the question. If your paycheck is not enough to cover the required payments for all your debt, you should probably take care of the mortgage first, since losing your home is probably the most serious financial consequence you face. Ideally though, you should be trying to make at least the minimum payments on all your debt, and if you are absolutely unable to do that in some cases, you should get in touch with the companies you owe money to and try to work out an alternate repayment schedule.

If your new job pays enough for you to keep up with all your payment requirements and you are asking which debt you should try to pay down first with your extra money, then chances are it should be the credit card debt. What you should do is list all your sources of debt and their interest rates. Then, rank them from highest to lowest rates, and start targeting the highest-interest debt by putting any extra cash flow toward that first. Again, with credit card debt at an average interest rate of about 13 percent, this is likely to be the most expensive form of debt you have, and should be targeted for early repayment.

There are a couple things you can do in connection with this exercise to help you save some interest expense. One is to check for refinance opportunities. Current mortgage rates are back down near 4 percent, so you should see if you can qualify for low enough refinance rates to save you some money.

The other thing you can do to try to save some interest expense while you are paying off your debts is to shop for better credit card rates. Check out what you are paying now, and then see if there are better deals available. It is a very competitive market, so there is no shortage of credit card offers you could consider.

Finally, while it is great that you are looking to pay down debt, you might not want to put every extra penny toward that goal. Your extended period of unemployment should be a recent reminder of how financial misfortunes can happen at any time. So, while paying down debt may be your primary goal, also start to build up some emergency savings. That way, you will be better able to keep up with your debt payments should you experience another career setback or other misfortune.

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