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How to prioritize and effectively manage debt

Some debts are effectively good debts while others are bad. People in Ohio could benefit from knowing which debts to prioritize first; in certain situations, it may be handy to invest extra money instead of paying off consumer debt.

Debt that comes with a high interest rate, such as most credit cards and some auto loans, should come first when deciding what to pay off because high interest equals large amounts of interest. Therefore, any extra cash should go toward paying bad debts down as quickly as possible. A large refund from the IRS is a great opportunity to eliminate or significantly reduce bad debts, but even putting small amounts of money toward credit cards each month in addition to the minimum payments could save money in the end. However, auto loans with lower interest rates might not warrant the same priority.

An auto loan, student loan or other debt with an interest rate of 7 percent or lower should be paid down after higher interest debt. Many of these debts are necessary and okay to pay off when one can. However, in contrast to good debts, these okay debts should still be paid off before one considers investing. Good debts are those with very low interest rates, like mortgages. If extra cash could be put toward investing and getting 7 percent returns, it makes more sense to invest.

Debt management strategies could go a long way toward keeping debt in check, but many people might not be in a position to benefit. If debt has accumulated to the point where it is unmanageable or an unfortunate event like job loss has occurred, speaking with an attorney about bankruptcy might provide a solution. An attorney may be able to explain the different types of bankruptcy and assist with filing.

Source: The Motley Fool, "Debt Management 101: The Good, the Bad, and the Ugly", Matthew Frankel, October 12, 2014

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