Different Types of Debt: Keepers and Losers

by Stacy Francis, CFP®, CDFA

A client asked me today whether I thought she should apply her upcoming Christmas bonus toward paying down her mortgage or the balances on her credit cards. While the answer to her question may come easily to some, the truth is, my client is far from the only one having a hard time keeping different types of debt apart. With this in mind, here’s a list of different types of debt, starting with the kinds you want to lose right away and ending with the types you may actually want to keep.

1. Credit card debt. Don’t do it, and if you have already done it, pay it back and never do it again. It’s that simple.

2. Loans against your 401(k). These are nowhere near as bad as credit card debt, but losing them will enhance your financial health significantly.

3. Auto loans. As long as you can afford your monthly payment without any problems, you can keep this type of debt.

4. Home equity loans/second mortgages. This loan type should be paid off before you consider losing the categories below.

5. Student debt. Student loans tend to be pretty favorable – pay them off after the types above, but before you consider making a dent in your mortgage.

6. Mortgages. Interest rates are generally favorable for mortgages, making it more important to contribute to 401(k) plans and other types of retirement savings accounts than paying off your mortgage.

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