Stimulus checks have been going out to the public since the middle of March, and at this point, you may already have that money in your bank account. If you don’t need that money to pad your emergency fund or cover upcoming bills, you’d be wise to use it to pay off debt. But if you’re going this route, it pays to be strategic. Here’s the hierarchy to follow for getting out of debt.
1. Pay off credit cards first, from highest to lowest interest rates
Of the different types of consumer debt out there, credit cards tend to be the most dangerous. Too much credit card debt hurts your credit score, and credit cards are notorious for charging high-interest rates that can make your debt very costly. If you’re using your stimulus to get out of credit card debt, pay off your card with the highest interest rate first and work your way down from there. Or, see if you qualify for a balance transfer. That way, you can move all of your credit card debts onto a single card with a lower interest rate.
2. Pay off a personal loan balance
The good thing about personal loans is that their payments are predictable since these loans are paid back in equal installments. But once you’re free of credit card debt, a personal loan is the next best type of debt to tackle.
3. Pay off a home equity loan or HELOC
The upside of borrowing against your home is that it can be fairly affordable from an interest-rate perspective. In fact, you’ll generally pay less interest with a home equity loan or home equity line of credit (HELOC) than you will on a personal loan. But it’s still a good idea to pay off a home equity loan or HELOC. Falling behind on those payments could put you at risk of losing your home, so if you’ve covered the above categories, go here next.
4. Pay off an auto loan
It’s common to carry vehicle-related debt for years, but if you have spare stimulus cash and don’t have any of the debts above, then putting some of that money into your auto loan is a smart move. That way, you’ll be debt-free sooner and can shave some interest off of your loan as well.
5. Pay off a mortgage
Chances are, a single $1,400 stimulus check won’t make much of a dent in your mortgage. But if you’re eager to pay off your home loan ahead of schedule and don’t have any other remaining debt in your name, then there’s nothing wrong with applying an extra $1,400 to your loan’s principal (the original amount you borrowed). Doing so will save you some money on interest and help you repay your home loan just a bit sooner.
The $1,400 direct payment could open the door to several debt payoff opportunities. Choose your path wisely so your stimulus money does the best possible job of helping your financial circumstances improve.
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