Having too many debts can be overwhelming. Which do you pay first? Does it matter?
Should you pay the creditor that screams the loudest first?
What Debt Should I Pay Off First?
While Dave Ramsey’s debt snowball suggests listing your debts from smallest to largest and paying them off in that order, some debts should take precedence over others because they can have worse consequences than others.
Here are bills you should pay off first because they can affect you the most:
Back Child Support Payments
Don’t pay child support and you could be found in contempt of court. That could land you in jail, have half your net wages garnished, and driver’s and professional licenses revoked.
A lien could be placed on your property, tax refund intercepted, and your car could be booted, among other things you don’t want. The only good news here is that tax liens are no longer reported on credit reports, so at least creditors won’t see it.
Owed Income Taxes
Owing the federal government money can leave you with high interest and fees, in addition to the original amount owed.
To resolve it, the feds may put a tax lien on your property, seize your property and garnish wages. Money in retirement accounts and other bank accounts you have may be claimed, and your home or vehicle may be sold to pay the debt.
Car Title Loans
These loans use your vehicle as collateral, usually with 30 days to repay the loan. They have high interest rates of 25 percent or more per month, equaling an annual rate of 300 percent.
Miss a payment and the lender can repossess the car. If you need your car to get to work, then getting the money for the loan will be that much harder.
The car may be sold at auction. To add insult to injury, you may be required to pay the difference between what the car is sold for and how much is left on the loan.
Missed Vehicle Payments
If you don’t have a title loan but are financing your car with an auto loan, paying late or missing a payment or two could cause the vehicle to be repossessed. You’d have to make the payments, along with late fees, to get it back.
Missed Mortgage Payments
Missing a mortgage payment is only behind missing a car payment because it takes longer to foreclose on a home than it does to repossess a car. A foreclosure takes an average of 19 months to process, giving you months to work out the problem.
That can be enough time to pay the missed payments and late fees, or at least find another place to live. Your credit score will be terrible, making it hard to be a renter or get another home loan.
Defaulted Student Loans
A federal student loan is in default after about nine months of nonpayment. A credit score sill start dropping after the first missed payment, and will get worse until a collector takes over the account.
Fees and interest will be added. Up to 15 percent of your wages may be garnished and your tax refund can be intercepted without a lawsuit. If the lender files a lawsuit, they can be awarded a higher percentage of your wages.
If you can talk a collection agency down on the amount you pay off for a student loan, the original amount may still be listed on your credit report and the difference will be listed as a write-off. That could hurt your credit tremendously.
With annual interest amortized at 400 percent or more, not paying a payday loan off quickly can leave you with a loan that is much higher than the amount you originally borrowed.
Stop paying and you could be taken to court or the account could be sent to a collection agency, which may sue you. Losing the case in court will put a judgment on your credit report, and wage garnishment may be ordered to collect. The judgment can stay on your credit report for 10 years or longer.
Your medical provider may let some small bills go, such as for $40. But owe a few thousand dollars in medical bills and you should expect to hear from a medical collections agency after only a few months of nonpayment. Lawsuits and post-judgment collection could then occur.
Borrowing money from friends or family can be tricky in a few ways. Relationships can become difficult, and some people may not be as forgiving as others.
Some may sue you in small claims court. Just the threat of a lawsuit could ruin a long-term relationship. Be wary of borrowing from or loaning money to friends and family.
Credit Card Balances
Credit card bills and other unsecured loans that aren’t paid on time can only get worse over time.
After about six months the lender could charge the account off and give it to a collection agency or take you to court to collect. Either way, your credit score will drop.
Collection agencies are some of the last people you want to talk to when you’re in debt, but in reality they’re the least of your worries.
That’s because old debts are subject to the statute of limitations in your state. After seven years, it can’t be reported on your credit report and there’s nothing a collection agency can do then to get you to pay.
Fresh debt — along with paying just a small part of an old debt — allows collectors to take legal action against you. Paying part of an old debt resets the clock.