Drowning in debt

Question: I have a question regarding in what order I should attempt to pay down the debt I have.

Facts:

1) credit card debt = $25K at 15% (1 card)

2) mtg = $80K at 6.25% (18 yrs left)

3) home equity loan = $12K at 6.25%

4) student loans = $20K at 9% & $40K at 3% (I can voluntarily defer these for 1 yr).

My concern is that I have no cash reserves. Not being liquid in the past has resulted in using the cc. Should I concentrate on building up my cash reserves while continuing to pay the minimum on the cc, then, once I have a few thousand saved, double the monthly payment on the cc's? Annette, Indianapolis, IN

Answer: I share your concern about your finances.

Now, it always bothers me when writing about debt how easy it is to say what you should do while knowing how difficult it actually is to reduce debt--and how long it takes to accomplish the goal. (I've been there and done that.)

That said, the destination of adequate savings and freedom from debt is well worth it the journey.

For the moment, I wouldn't worry about two of your debts, the primary home mortgage and student loans. As you suggest, you probably will want to voluntarily suspend the student loan payments for a year to buy yourself some financial relief. You'll have to run the numbers but that strikes me as a better idea than paying the minimum on the credit cards. The price of deferring student loan payments is a bigger overall debt burden over time. But you can always get more aggressive about paying off the student loans later on when your finances are in better shape.

The credit card debt and the home equity loan are your most expensive debts. The interest rate on both could go up, too. I don't know your income, but in the hierarchy of what debts to attack first, I would aggressively go after the credit card debt and then the home equity loan.

I've mentioned this book before, but it's full of practical advice you might find useful: Reduce Debt, Reduce Stress by Gerri Detweiler, Nancy Castelman and Marc Eisenson. (You can look at it on their website reduce-debt-reduce-stress.com.) It offers a numbers of tricks for getting rid of credit card debt. The essential idea is to start out slow but with techniques that snowball with time.

That's how I would tackle the debt burden. Are there other thoughts or suggestions in the Getting Personal community? Thanks.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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