When you’re looking at your debts, the main thing that you want to go ahead and take into account is - you want to be unemotional about it, and you want to examine interest rates.
It’s easy to get caught up in large debts or small debts. It's easy to get caught up in trying to figure out which debt it is that you want to eliminate…but ultimately it only matters that you focus on the interest rates, because the interest rates are the determining factor in whether or not you’re eliminating that debt.
The best way to think of this is that if you had a loan that was at 0% and you had a loan that was at 20%, which one would you want to pay off first? The answer is that you would want to pay off the one with the 20% interest rate first. And so that’s going to be the focus on any of your debts, as well. You want to organize those by interest rates and then focus on the higher interest ones and work your way down towards the lower interest rates.
Debt consolidation can be a good option in some circumstances. One of the tools you can use for debt consolidation is a HELOC. You can use refinancing of loans, you can use lines of credit, or things of this nature. Those are all typically better interest rates and offer better interest rates than what you would find in credit cards, for example. That’s the main one that people run into, which is credit cards, which are very high when it comes to their interest rates. They’re up around 25-30%, relative to a HELOC, which could be closer to 5-10%. HELOCs also allow for a longer timeline. They’re based on a longer repayment period, so the payments are smaller, while the interest is smaller, and so it can be a much more affordable solution than fighting down credit card payments on a month-to-month basis, where you’re effectively only paying interest and really not taking any bites out of the principal.
Refinancing debt is effectively taking care of these payments and eliminating them, but if you have habits where you’re living beyond your means and establishing new debt on a costly basis and on a consistent basis, then that’s something that you want to address before you go ahead and consolidate this.