Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
Dear Opening Credits,
I have a lot of bills and not a lot of money. Can you tell me what I should pay first, second, third, and so forth? Here they are: $9,600 for a student loan, but I’m still in school; $5,000 on my car; $4,000 between my three credit cards; and $10,000 to my dad, but he’s not charging me any interest and said I can pay him back whenever. I also have a bunch of parking tickets that I need to clear. What would you do if you were me? Thank you for your help. — Sandra
Well, the first thing I’d do if I were you is stop charging and borrowing. And I’d only park my car in legal spaces from this point forward.
OK, I’m being a little flip, but Sandra, you must stop putting yourself into uncomfortable economic positions. Some of the debts you listed are avoidable. Sure, you may need to borrow for your education, but the time has come for you to make financial decisions that will benefit you, not harm you.
And yes, you would be wise to list all these liabilities in order of importance. With so much going on, getting organized is a great idea. Sounds like cash is limited, but I hope you have enough for the plan I’m about to draw up. Here goes:
1. Parking fines: Your primary task is to pay off those legal fines. If you wait too long, the amount you owe can escalate dramatically. Other possible repercussions vary by jurisdiction, but may include: not being able to renew your registration, facing serious collections activity, seeing your car impounded and having your driver license suspended. This liability clearly earns the top spot.
2. Credit card debt: You don’t mention what interest rates you have on the credit cards, but revolving credit lines typically have higher rates than secured installment loans, such as car loans. Rank the three accounts by how much they’re costing you in finance charges. Pay more to the most expensive card, and pay the minimums to the others until the first is at a zero balance. Then hit the next one, then the next.
3. Car note: While you’re dealing with what you owe to the credit cards, be sure to stay on top of your car payments. You need not send more than required, but don’t miss a due date. Depending on how aggressive the lender is, even one or two skipped payments can result in your car being repossessed.
4. Dad: Why is your father so far down on the list? Well, he is undoubtedly important, but it sounds like there’s a certain casualness to the loan. And right now, you have costly bills that are eating into your slim income. Once you’ve taken care of those, concentrate on what you borrowed from the big guy. In the meantime, continuously express your gratitude, and assure him that you’re taking the loan seriously. Update him periodically on your progress. Imagine how he’ll swell with pride when you pay back every penny!
5. Student loan: This balance is dead last on the list, mainly because it’s not even due yet. I hope that when you do have to start paying it, you’ll be free of line items one through four. Then, send as much as possible, even if your expected payments are small. Though student loans usually offer low interest rates and long repayment terms, it makes sound financial sense to delete them quickly.
So that’s my strategy for dealing with multiple liabilities. If you stick to it, when you graduate and begin applying for jobs, your credit report will also look adorable to employers. At the very least, they’ll see no evidence of legal fines or credit card debt, and a sparkling 4.0 payment history.
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