In the realm of debt payment plans, there are two main schools of thought. One is to pay off your debts, immediately, from the highest interest rate to the lowest. The idea is that this saves the most money, over time.
The other says that, when you pay off your debt from low to high, you gain increased momentum on your debt repayment. This can help in paying off debt fast, but it is more difficult.
Regardless of your strategy, a solid plan will give you what you need to focus on digging your way out of debt quickly and efficiently. Join us today as we bring you what you need to learn how to pay off debt in collections.
Debt In Collections: A Quick Recap
Debt collection refers to any time a financial account is sent out to an external debt collector because it's been unpaid for too long. Debt collectors collect unpaid debts from debtors on behalf of the original company you had the debt with. This happens once you've missed multiple payments for any given reason.
The collection policy your creditor uses may differ. This depends on how they handle business, as well as your specific credit card provider. The latter will supply your information based on their conditions and stipulations, which affect how they do business. Some companies may send you to a collection agency after a few months without paying. Others may do it after a month.
Which Debts Should You Pay, In Which Order?
Becoming debt-free is a good goal to have. That said, it doesn't always make sense to focus on paying every single creditor everything they're owed. This could leave you with less money for other important processes, investments, and savings. It's also a quick way to stress yourself out!
In general, you'll want to pay off high-interest debts first, and quickly. Double-digit interest rates are the most pressing, so get them out of the way as soon as possible.
There are times when, for instance, it will make more sense to pay off a car loan early because your vehicle is consistently depreciating. Interest payments on assets like this constantly lose value, which is less than ideal. To pay off your car loan, pay off this debt as early as you can.
With other debts, however, advance payments actually make less sense. Paying off mortgage debt, for the most part, is not an early priority. The same thing goes with a federal student loan. There's usually a low-interest rate attached to debts like this, so they are on the other end of the spectrum in terms of your priorities. Your interest payments may also be tax-deductible, which is something else to note.
With student loans, you can deduct up to $2,500 worth of interest, here, provided you come in under that income limit. Itemize on your tax return, and you can also deduct interest on mortgages up to $750,000. This number goes as high as $1 million if your home was purchased ahead of December 2017.
And Which Of Those Debts Do You Pay First?
The biggest question to answer is what debt should you spend your extra money on. You have two options:
So you've identified which debts you have to pay off right away. Now you need to decide which of those debts you'll pay in which order. In order to be truly effective with your money, focus mostly on paying one debt immediately. It's not against the rules to make small payments across all of your debts, but that will draw things out. Rather, spend as much extra money as you can as early as you can to pay off one particular debt. Don't miss the rest of your minimum payments by doing this, but spend responsibly with this as your goal.
But how to decide between paying off debt in collections? There are two approaches you could take to help lower your debt:
Snowball
Using this method, you can make additional payments on your debt, starting with the lowest balance. This ignores any differences in interest rates. You can only make additional payments once the smallest debt has been completely paid off.
As far as payments go, simply add whatever you make onto the smallest debt, then move to the next largest debt. Wash, rinse and repeat until all debts are paid off. If you made a monthly payment of $200 on a credit card with a $1,000 balance and a minimum payment of $50, with a $2,500 balance, you'd pay $1,000 first. Add $200 to that monthly minimum, along with the balance, and your new monthly payment comes out to $250.
A Debt Avalanche
This method is to pay off your debt with the highest interest rate first. Dedicate your extra money to pay that debt and, when the balance is paid in full, take that money and begin adding it to your minimum payment. Continue this approach until all of your high-interest debt is paid off.
Using this method, you can start paying off debt with the highest interest rates, first. Spending your budget on that debt, first, before paying the balance, in full, you can take your remaining budget and add it to your minimum payments.
Paying Off Debt In Collections
In the world of debt consolidation, paying off what you owe is always the best investment you can make into yourself. Put these at the top of your "to-do" list. But, if breaking out of the cycle of your own debt was easy, everyone would do it. It's never straightforward, especially if, like so many others, you find yourself in debt to a host of different creditors.
Today's article should give you everything you need to be able to prioritize your debts in the correct order and pay them off in a way that works for you. For more insights into everything from tips for paying off debt in collections to improving your credit score, check out the rest of our blog content, today. Visit the Finance and Loan sections of the Bootstrap Business Blog right now!
