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Debt Repayment Strategy

Truecredit.com recently ran a short article about deciding what debts to pay off first when you are considering your credit & debt strategy. Below is a summary of their recommendations.

These days, everyone seems to know someone who’s been out of work for more than a year or has had to foreclose on a house. With resources scarce, sometimes consumers have to make tough choices about which debts they can pay, and which will have to wait.

If you’ve got to postpone paying money you owe, start by assessing which debts have the least favorable terms. Look at interest rate and benefits, such as tax-deductible mortgage interest vs. non-tax-deductible auto loan interest. Calculate which non-repayments would cause the least amount of damage. Take into account the affect on your credit score and what that would mean for future loans.

Unsecured debts
You won’t lose your home if you don’t pay unsecured debts, like hospital or credit card bills. But you should start by trying to negotiate with the lender. Some hospitals are willing to work out a payment plan to give you breathing room. Credit card companies will sometimes be willing to accept a lower payment from a long-time customer. If you can’t negotiate better terms and you don’t send payments, your credit score will suffer. Eventually the account could be turned over to collections and/or you could be sued.

“Strategic default” not such a great strategy
If you owe more on your mortgage than your home is now worth, a “strategic default” could seem to promise freedom. Some homeowners think they could buy someone else’s foreclosed property at a much better price than their home, but in this economic climate even buyers with excellent credit have difficulty obtaining mortgages. So defaulting isn’t a very realistic option. In general, try to negotiate and explain, and buy yourself time if you can. Remember that lenders and creditors are not unaware of the grim economic conditions many of us face, and you won’t be the first to ask for an extension or different terms.

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