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September 13, 2016

Having debt can be overwhelming, stressful, and expensive.  Money problems from having too much debt is actually one of the top 10 reasons people in America divorce.  Ask anyone struggling with debt and they will you that is no picnic.  So what steps should you take to become debt free.

Know Your Debts

The first step to paying off your debt is to know what debts you have.  Not all debts are the same, some debts are secured debts and some are a unsecured.  Secured debts include purchases where there is collateral such as home or car loan while unsecured debt have no collateral like a credit card , personal loan , or payday loan.  Generally speaking your secured debts will come with a much lower interest rate and a set time for payoff while the unsecured debts will come with higher interest rates and no set time for pay.  When you are looking to become debt free we recommend paying working on your unsecured debts first.

Attack The High Interest Rates

When you look at your credit cards or other unsecured debts you will notice that all the interest rates can be all over the place.  Interests rates on credit cards can actually vary from 0% to 40% or higher.  There is actually no law that sets the legal limit for the interest, creditors can charge whatever wish.  So as you begin to work to pay off your debts start with high interest ones first.  These are the ones that can end up costing a lot of money long run if they are not paid.  As one gets paid off then take the money you were using on that card to work on the next highest one and so on.

Move To The Secured Debt

Once you have paid off all your unsecured debts you can move to secured debts. If you have a car as long with a house you may want to pay off the car first.  Cars will almost always have a higher interest rate than a home and will depreciate while your home may actually grow in value.

Keep Your Accounts Open

Once you have paid off your debts it will be tempting to just cancel all of your credit cards and forget about them forever.  While this may seem like a great idea it can actually hurt credit.  There are two major portions of your credit that can be affected by closing your accounts.  The first is the “length of credit history” which refers to how long you have had positive credit. This accounts for about 15% of your credit and if you close the accounts you will lose having the age from the accounts  The second part of your credit that will be affected is your “credit utilization ratio” which is a major part of your credit score and accounts for 30%.  By closing your accounts you are losing all the available credit that had been given to you.  The better option would be to keep a a couple accounts open and use them sparingly and pay them off each month.  This will take discipline but will keep your credit score high.

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