I am trying to pay off multiple credit cards and student loans. I am not sure which is better to pay off first: credit cards still with the actual credit card company (discover, chase, etc) with a larger balance ($2000-$4000 range) or smaller debts ($400-$500 range) that have gone to collections. Which should I attack first?
You are wise to attack your debt strategically. You are taking control of the situation rather than gliding along and hoping everything works out for the best. This attitude combined with planning will bring you to debt freedom in the shortest time and with the lowest cost.
I have two tactics for you to consider. But before I get into the specifics, I think you have several issues that may be in conflict. The first issue is interest expense. The second is your credit rating.
Interest expenses first
Let us talk about the "interest first" approach. You could pay off the highest interest accounts first. By paying as much as possible on the highest interest account -– and at least the minimum monthly payments on the remaining accounts –- you limit your exposure to expensive interest payments that do nothing to lower your principle balance. After paying off the highest interest rate account, apply that payment to the account with next highest rate. Continue in this manner until all of the accounts are paid off.
Credit rating first
Now let us consider the "credit rating first" approach. When you have multiple accounts with varying levels of debt, you could tackle the account with the least amount of debt first. This will be the easiest to pay off (providing some psychological benefit) and provides a slight bump to your credit score by showing recent account activity resulting in a zero balance. If you have multiple accounts with small balances, consider knocking off the smallest first to give your FICO score a lift.
You have an interesting twist to consider with the accounts that have gone to collections. These accounts are damaging your credit score, so it is tempting to pay them off, not only because you owe the balance, but because of the damage they are causing. Because these are in collections, you may want to consider negotiating with each creditor about a lump-sum settlement that is less than the actual balance. Such a settlement will cause even greater harm to your credit score, but will save you money that you can apply to other balances.
What approach you take depends on your goals. If you hope to get a mortgage or want to qualify for a low-interest loan in the near future, then you want to preserve your credit score at all costs. However, if your near-term credit score is not an issue for you, then play hardball with your accounts in collections, and pay down your highest-interest balances first.
To learn more about credit card debt, I encourage you to read the Bills.com Credit Card Debt articles.
I hope this information helps you Find. Learn & Save.