A)
Credit card obligations, because they have the highest interest
costs and the interest costs are not deductible. When inflation
was running wild in the 1980s, and credit card interest was
tax-deductible, it made sense to avoid future price increases
by buying on credit. Now, inflation is low to moderate and credit
cards are no longer tax-deductible. Add to that the fact that
the cost of credit card borrowing is at one of its highest points
in years and you have multiple reasons to enhance your net worth
by retiring credit card debt. Don't fool yourself into thinking
that if you are making the minimum payment required each month
that you are servicing the debt. The chart below shows just
how ineffective paying the minimum monthly payment is. It takes
forever to pay even a small balance off. You have to make extra
payments to get anywhere because credit card lenders have lowered
the minimum payment in many cases to just 2% of the balance.
A
couple of extra moneysaving recommendations from Bankcard Holders
of America are:
1)
Send in your payment as soon as you get your bill. The sooner
the bank receives it, the less interest you will pay.
2)
Pay more than the minimum payment. If you pay only the minimum
amount due, it can take you decades to pay off your balance.
3)
Refuse a card issuer's offer to make no payments for one month.
That just digs you deeper into debt.
4)
Consolidate your cards. The fewer you hold, the easier it is
to keep track of them, avoid impulse spending, and reduce your
risk if the cards are lost or stolen. Obviously, it also pays
to drop a card charging a higher rate in favor of one with a
lower rate.
5)
Beware of "teaser rates," - very low initial rates
that surge after a number of months. Read the fine print. Cash
advance fees can be steep to compensate for the low rate. A
card from First USA carried a minimum of $5 per cash advance,
even if the advance was for only $20.
One
simple strategy to get you started on improving your net worth
is to switch your credit card debt to card carriers that charge
lower interest rates. Kiplinger's "Best Deals in Credit
Cards" are as follows:
B)
Installment debt on cars, boats, appliances, etc., where the
interest cost is not tax deductible either.
C)
First and second mortgages. (Paying off a mortgage before investing,
however, may not be the best strategy unless you are a very
conservative investor because the interest paid on mortgages
is normally tax-deductible and because the interest rate on
most mortgages is lower than the yield on many types of investments.)
By
paying off credit card and installment debt, you are giving
yourself a guaranteed return on your money. Make a list of all
such debts and list them by the interest rate you are paying
on them. If the highest is a Visa card with $2,000 owing and
the interest rate is 17.9%, you will guarantee yourself a return
of 17.9% on the $2,000 you use to pay the debt off. That's a
great return on your money.
The
strategy is to keep paying debts off in the order of their interest
rate. The highest remaining is always where you want to focus
your attention.
