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How should I prioritize my debt?

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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 -- what debts should I pay off first?

A: What bills should be paid first depends on whether or not your paycheck is enough to cover all required debt payments. If the new salary isn't high enough to pay all your bills, you should probably take care of the mortgage first, since losing your home may be 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 to which you owe money and try to work out an alternate repayment schedule.

How to prioritize debt

If your new job pays enough for you to keep up with all your payment requirements and you are wondering how to prioritize debt, then chances are it should be the credit card debt. What you should do is:

  1. List all your sources of debt and their interest rates.
  2. Create a debt priority ranking by listing them from highest to lowest interest rates
  3. Start targeting the highest-interest debt by putting any extra cash flow toward that first. With credit card debt at an average interest rate of more than 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 range between 3.8 and approximately 5 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 see if there are better deals available. It is a very competitive market, so there are many credit card offers you could consider.

Is it better to pay off debt or invest?

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 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 should be better able to keep up with your debt payments if you experience another career or financial setback.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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