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Types of Debt

There are two types of debt – good and bad. Good debt is defined as that for which there are assets or collateral which are worth at least the amount of the debt. Bad debt is that for which there is no collateral and that which was incurred for goods and services which are not lasting. Bad debt usually carries higher interest rates and minimum payments which result in paying much more than the original debt and over a lengthy period of time. When a consumer has lots of bad debt, he is looking at losing lots of income in the payment of that debt, and it makes sense to take steps to resolve your financial situation by getting debt-free forever. The strategies are not difficult to understand, but they do require some self-discipline and commitment.

Strategies for Eliminating Bad Debt

The first step in this process is to list all of the credit card debt in the order of amount, the lowest total amount being #1. Divide the total amount of each debt by the minimum payment amount, and you will get the number of months necessary to pay off that debt. You will see that the card with lowest total amount will be paid off in the smallest amount of time. This is the card you attack first.
Develop your monthly budget, subtracting all essential expenses from your total income. This is your disposable income. You must now commit some amount from that disposable income to the payment of card #1. In addition to the minimum payment, you will not be paying this new amount from your disposable income. The results will be apparent in very short order, as the balance continues to drop much more than when you were only making the minimum payment.
Once you have paid off card #1, you will take all of that payment, add it to the minimum payment of card #2 and begin making this new higher payment. Proceed in this manner until all cards are paid off.

A Word About Savings

Along with the payoff of your bad debt, you need to provide for the crises and emergencies that will undoubtedly occur. If you can commit to savings some amount of your disposable income which is not being used for debt payoff, you should do so. In this way, you will not have to use credit when those emergencies arise.

Paying Off “Good” Debt

When you have your “bad” debt paid, and you are on a regular savings plan, you should consider reducing your good debt as much as possible. If you can double the principle payment on a mortgage loan, for instance, you can save thousands of dollars over the life of the loan. It makes sense to get into a position of financial freedom long before retirement.