When finding yourself with extra cash, some analysis is required when deciding which debts to pay off first.
There are few things as disheartening as finding yourself under a massive amount of debt. Unfortunately, that’s an experience many consumers have, whether it’s maxing out credit cards or financing a new home. So, if you have a few extra dollars in your bank account, you should use them to pay down your loans ahead of schedule, right?
In reality, choosing to eliminate your debt is not so clear-cut. Though some loans are inherently toxic to one’s financial picture, other forms of credit are relatively benign. When you consider the alternate ways in which you can spend your excess cash, it might do more harm than good to use it to pay more than your monthly minimum.
- If you have several loans or debts to repay, deciding which ones to pay off first can be a difficult task.
- Try to prioritize high-interest debts as well as those that will most impact your credit score negatively if you fall behind.
- This prioritizing based on objective metrics can be hard as people grow emotionally attached to paying off certain types of more benign debts like a home mortgage or student loan first.
Read this article for a discussion of what debts to eliminate now, what debts to pay down later, the use of tax-advantaged accounts, and the benefits of creating an emergency fund.