Questions About Debt

 

Which debts do I pay off first? Essentially, this all boils down to the interest rate. Typically, your highest interest rate debts will be your credit cards. You should put all your extra cash toward paying off the highest interest rate card while paying the minimums on the rest. Once that one is paid off, move on to the next highest interest rate and so on. When you're considering other debts (such as student loans, home equity loans, etc.) versus credit cards, again look at the interest rates. Your interest rate on your car loan is typically higher than your home equity loan, mortgage and student loans (because these are generally tax deductible), so you should try to pay them off fastest. It's essentially an arbitrage. Look at the interest rates, consider the tax deductions, pay off the highest interest rate first.

Once I pay off those cards, should I close them? Not immediately. Closing cards will lower your credit score in the short term. It's not a good idea to do this if you're in the process of trying to get out of debt, because you may be asking your card issuers to lower your other interest rates in the process.

How do I "fix" my credit report? You don't. Any agency that says it can fix or repair your credit is not telling you the truth. If there is information on your credit report that doesn't belong to you, you can get rid of it by filing a grievance with that particular credit bureau online or via the mail. But if you have late payments, judgments, collections that actually belong to you, that information will remain on your report typically for seven years. The good news is that in the eyes of creditors, the most important time horizon is the most recent 24 months - your recent credit history - so if you can improve your behavior, you'll see your score improve sooner than seven years.

What's the best way to get my credit report? Go to annualcreditreport.com. This is a Web site established by the three major credit bureaus: Equifax, Experian and Transunion. The site allows you to pull one free report from each agency free each year. You should pull one every four months on a rotating basis to be sure you are not a victim of identity theft.

How do I get lower interest rates? There are two ways to get lower interest rates: by simply asking for them, or by consolidating.

If you pay your bills on time and use your credit cards rather than keeping them in a drawer gathering dust, you can call your credit card companies and ask for a reduction in your interest rate. This is not as easy a sell as it used to be - the banks are not making as much money as they once were from their other products - so they're actually raising interest rates as the Federal Reserve is lowering them. But it is definitely worth five minutes of your time to call the 800 number and tell the agent you have other, better offers and are considering taking them.

The other way is to consolidate: By rolling credit card debt into a lower-interest-rate home equity loan, you save yourself a bundle in interest over time. The problem is that about one-third of people who consolidate with home equity debt go out and charge their credit cards right back up. That's a problem because then you put your home on the line. So don't go this route unless you are certain that you can keep your hands off the plastic.

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