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Defining an Effective Payment Hierarchy

An Effective Payment HierarchyThere are a lot of things in life that make more sense and work better when a specific order is followed. It doesn’t make sense, for example, to expect to harvest a crop if you haven’t planted the seed and nurtured them to maturity. In the same way, your financial future is dependent on prioritizing the way you spend your money and putting in place a payment hierarchy that shifts resources to the most important obligations down to the least.

HOUSING – The Foundational Responsibility

Losing your home to foreclosure would cause a devastating trickle down effect on your entire life. What often happens is that people allow their attention to be drawn toward other important issues like auto loans and credit card debt and away from their most valuable asset – which eventually leads to defaulting on their mortgage.

According to a recent study by TransUnion, an increasing number of consumers are putting their mortgage at the top of their payment list, a priority that makes sense. By paying your mortgage first, you will not only protect the most important investment you may ever make, but when home owners make their mortgage payment number one in their hierarchy of household payments, it bodes well for the economy. As a result, lenders will relax their grip on qualifying for new loans, providing relief to millions who would benefit from refinancing or restructuring of their current debt.

Other Top Repayment Priorities

You’ve worked hard to get what you have and you want to keep it. The second tier of an effective payment hierarchy would be to repay debts attached to your vital household assets. They that may include an auto loans, insurance premiums and other secured debt. Any borrowing you’ve done that imposes a lien on your home falls into this category – home improvement or home equity loans.

Right after your secured obligations, unsecured account balances should be the next priority in your payment hierarchy. Unfortunately, many Americans consider credit cards a necessity in today’s society and they’re not afraid to use them . Mishandling credit card debt can have a devastating effect on your credit score and make it difficult to be approved for the credit or loans you may need down the road.

Addressing Unforgivable Debt

If you’re a college graduate chances are you have outstanding student loans that can never be discharged by bankruptcy, so it’s important to pay them off as soon as possible. It’s been estimated that the average graduate in the class of 2013 will be burdened with more than $35,000 of student debt. While its low on the list of payment priorities, getting out from under that much debt will be bring a sense of freedom to move forward with your career and family.

If you’re seeking financial independence, your first goal after graduation needs to be paying off any private loans, even if rates are currently low. Most have variable rates and can change from month to month and cost you more in the long run than federally backed loans. For those, stick with the standard flexible payment plan (10-year) and save yourself thousands of dollars in interest.

Determining Your Priorities

Everyone will have variables to this short hierarchy list of payment priorities. You may have rent to pay as opposed to a mortgage, but you have a home it should be your top priority followed by the essentials of living – food, utilities, clothing and taxes – followed by the obligations to your debtors. Break down each category in detail to be more specific about what is the most important to you and your family.

And don’t forget, if you ever find yourself in a difficult position that results in missing a payment, be proactive as opposed to reactive. Contact your creditors to ask for help so that you can avoid a credit score hit that will increase interest on your account(s).

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