Why You Are Paying off the Wrong Debts

Where do you start when paying down debts? If you are like most consumers in a new study, you first choose to pay your personal loans. These debts are usually the easiest to keep up-to-date on. However, this is not always the best tactic to take.

How Consumers Are Paying Their Debts

TransUnion, a consumer credit company, recently released a report that found that personal loans tend to take priority as we pay our bills. Compared to other debts, consumers were least likely to be delinquent on personal loans. These were then followed by car loans, mortgages, and credit cards.

TransUnion conducted the study by looking at the delinquencies of consumers who had at least one active mortgage, auto loan, unsecured personal loan, and credit card. The study was conducted between 2009 and 2015 with roughly two million people. Co-author of the study, Nidhi Verma, said they were surprised to see personal loans at the top of the list.

Verma believed that consumers were not putting personal loans first because they thought they were more important. Instead, she thought it had more to do with the nature of the debt. Personal loans are usually smaller, have shorter terms, and feature lower monthly payments. Consequently, the payments are easier to keep up with.

What You Should Do Instead

This study makes it clear that most of us are not approaching debt with a plan. If this sounds familiar, we have some tips to help you. First, if you are struggling to pay all of your monthly bills, try reaching out to your creditors for help. You might be surprised to find out how willing they are to work with you, whether it’s working out payment plans or temporarily reducing minimum payments and interest rates. You might also meet with a nonprofit credit counselor.

Another step you can take is to list out your debts. There is no magic key to prioritizing your debts, but here is a sample priority list:

  • Family necessities – this includes unavoidable medical expenses and groceries
  • House-related bills – be sure to pay your minimum to keep utilities running
  • Auto loans – this is only if your car is an absolute necessity (for work, transporting children, etc.)
  • Tax debts and child support – the government has the ability to seize these debts through garnishing your paycheck and other methods

A good rule of thumb is to consider what the consequences would be of not paying off a debt. For instance, there is little recourse that credit card companies have. Do not let them take your money first just because they keep calling you.