Are you two dealing with debt? Learn how you can approach it so you’re fighting the debt and not each other.
Note: This is a question I received from a reader and he kindly agreed to let me share his situation along with my response. (some details have been adjusted for privacy).
Which Order Should Debt Be Paid?
I am a 20-something year old small business owner with some uneven financial history.
I am at the stage in my life where I have to buckle down and fix my credit, get out of debt, and build a solid financial future with my fiancee.
My fiancee recently got a job and so we will have a consistent income for the first time in 2 years. We would like to take this opportunity to get out of debt.
We are getting married this summer (small debt free wedding) and I am trying to figure out should we eliminate our debts together? Or should we pick one person to get debt free and raise their credit then attack the other persons debts?
I have a higher credit score (high 500s) but more debts ($12000)
She has a lower credit score (low 500s) but less debts ($9000)
We can put a little over $600/month towards our debts for the next 24 months which will get either of us out of debt, but not both.
If we apply it across the board we will both have less negative accounts on our credit scores but will both still be in debt. We can of course keep paying off the debts.
Paying Off Debt Together
I think it’s great that the two of them have decided to work together on their finances and allocated $600/month to pay it down.
It sounds simple, but family finances can be incredibly hard if the two of you aren’t on the same page.
My response was basically that getting rid of both of their debts is important for financial and relationship reasons.
Financial Reasons for Paying Down Debt as a Couple
When we went to compare mortgage rates, the loan officer told us that they look at the lowest score between the two of us to determine the rates they’ll offer.
If these two are seeking to build their credit scores for a future purchase, like a mortgage, then increasing both of your scores is key.
What’s great with their plan of paying off the debt is that while they lowering the balances, they are in effect raising their credit score in more than one way. How?
Let’s look at how credit scores are calculated:
35% Payment History
30% Amount Owed
15% Length of Credit History
10% New Credit
10% Types of Credit
Being consistent on their debt snowball can help them improve their credit history and reduce the amount they owe. That’s 65% of their credit score.
If you’re looking for some tips on how we cut down on our debts, our system was basically:
Elle Martinez helps families at Couple Money achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth. Learn how to live on one income and have fun with the second..