What type of debt should consumers put priority on paying down?
The Motley Fool recently reported the average credit card debt owed by many Americans is a problem that negatively affects their credit scores. However, a large percentage of U.S. consumers also carry other types of debt.
With unemployment rates soaring due to the COVID-19 pandemic, people owing debt are struggling to pay their bills and find they need to prioritize which ones to pay. Even those able to keep up with their regular bills might still be facing credit problems due to low scores. In an effort to improve them, they face the dilemma of deciding what to pay first.
Pay bills on time
To build a stronger credit score, the main thing is to strive to pay bills on time. People who can currently afford to should absolutely keep up their scheduled payments. Consumers who find themselves with a few extra few dollars each month can look to increase their payments to pay down debt in an effort to get ahead. The question is once this is taken care of, what debt should they prioritize?
Value of paying down high-interest credit cards
Consumers carrying several loans or credit card debts face a difficult decision when deciding what to pay first. Experts generally suggest consumers should prioritize high-interest debts, along with those that negatively impact a credit score. Mortgages and student loans typically have much lower interest rates. Paying off high-interest debts means money saved on interest can be put towards other expenses.
Housing a priority during the pandemic
During the pandemic, for many people, putting an emphasis on paying down high-interest credit card debt isn’t as straightforward as it sounds. CNBC reports financial specialists say consumers should put a priority on housing right now because people need a safe place to stay.
Failing to pay rent or mortgage can result in an eviction or foreclosure. The CARES Act put safeguards into place, but many of these stipulations are set to expire, and states will be putting their own eviction laws into place. Additionally, people may have to pay all missed payments back at once protections are removed. This will be difficult for many.
An individual decision
Determining which debt to pay first will depend on the individual’s current financial circumstances. If still employed during the pandemic, a good strategy is to bring down high credit card balances. However, people suffering a job loss or cutback of hours due to the pandemic should focus on keeping their housing intact.
The better a credit score, the easier it is to come out of debt. Lenders are more willing to approve loans or offer better lending terms for people with stronger scores. Fortunately, consumers without a credit score or with a low score have options. For instance, they can build an alternative credit score that lenders can use when making credit decisions.
If you don’t have a traditional credit score or you’ve found yourself in a situation where yours is considered fair or low, PRBC can help. Our alternative credit scoring method helps you build a healthy credit score by paying your normal bills, such as rent, cellphone, and utilities. To learn more, contact PRBC today.