Do you find yourself consumed in a mountain of debt considering a debt consolidation loan and struggling to decide which bill to pay off first? Is it the department store card with a 24.99% interest rate? Or maybe it's your car loan that you financed for 72 months? Or should you double up on your mortgage and become a home owner sooner? When it comes to paying off debt, many have their opinions to where the pecking order should be begin. Dave Ramsey, author of Total Money MakeoverTM, recommends the Debt Snowball approach. This method suggests you make a list of all your debts, smallest to largest while disregarding interest rates, and paying off the smallest to largest to help you achieve satisfaction as you mark off the paid balances. Suze Orman has a different approach. Catching another of Suze's episodes, she shared her Loyalty List of Paying Off Debt. Suze shares which debts you should pay off sooner rather than later. When you don't have a lot of extra cash to spread around, this might help with your decision.
First, a disclaimer. I do not endorse Suze Orman. Sometimes her advice is downright scary. But I thought this was a decent approach on helping individuals struggling with debt to sort through the mess.
6 Kinds of Debt According to Suze Orman
Suze first breaks down the six kinds of debt that that all people have:
- IRS Debt
- Student Loan Debt
- Personal Loan Debt
- Mortgage Debt
- Car Loan Debt
- Credit Card Debt
Any of these sound familiar? Probably more than you want to admit.
The first on the list is debt owed to the IRS. As Suze says, owing any money to the IRS is, “Bad, bad, bad.” (I think she added a few more “Bads” in there). I couldn't agree with her more. Anytime you owe money to the IRS is not a good thing. Why? Primarily, since the IRS can legally seize your money via your bank accounts at anytime. Why would you want to own money to a entity that has legal authority that can do anything they desire? Don't mess with them, period.
Student Loan Debt
Next on the list……paying for that college education. One reason to keep paying your student loan debt is that it can not be discharged in a bankruptcy filing. Sure, you can arrange a deferment or forbearance, but; whatever you do the interest will continue to accrue. Thinking about not making your student loan payments? It's okay, they can just garnish your wages to get their money back. Ouch!
Why would Suze think that personal debt would rank higher than credit card debt? Suze argues that when somebody has personally loaned you money they have done so because they trusted you would pay them back. Not paying off your friend/family member/loved one will negatively affect your relationship. Think of the uncomfortableness of being around that person at a family function or party. Can you say, “Awkward”. Besides, by not paying them back you could be putting them at financial risk. You must be responsible to those who helped you and make it a point to pay them back. If you rather not take the approach of being personally loaned money, here are some tips on how to get the best personal loans.
“You don't want somebody to take your home away from you”, Suze says. The past year the term “foreclosure” was too common place and a sad reality for many home owner's. The last thing you want to lose is your home. Suze suggest to do your best and keep making those mortgage payments.
Car Loan Debt
After you continue to make your house payment make sure you still have a way to get to work to be able to keep making those payments. Losing your car might put a damper on this. Make those payments and don't let your car get repossessed.
Credit Card Debt
Many of you think that credit card debt should be first on the debt loyalty list. Suze argues, “Credit card debt is unsecured debt.” That means that if you don't pay it, they can't take your home or your car. They also can't take your money, seize your accounts, or make you feel guilty at a party. On that note, I agree with Suze. Often times I've had clients that have wanted to cash out their 401k's to pay off their credit cards. Whatever you do, DO NOT do this! Your 401k is protected from bankruptcy and might be the only source of money if you if going bankrupt becomes a reality.
What do you think of Suze Orman's Debt Loyalty List? Do you agree with her order, or would you change it?