7 Reasons You Should Start Paying Down Your Debt Now
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You might be thinking that however much debt you have is a manageable sum, and that you’ll pay it off one of these days. After all, there are plenty of other things you want to spend your dollars on.
It’s worth rethinking that position, though, because getting out of debt is a supremely worthwhile goal, and the sooner you pay off most or all of your debt, the better off you’ll likely be. Here are seven reasons to do so.
No. 1: Debt keeps you from reaching financial goals
First off, the debt you’re carrying is keeping you from attaining various financial goals. If, for example, you’re spending $400 per month on debt repayments, that’s $400 that isn’t going into a retirement-savings account or a college-savings account. It isn’t going to help you make a down payment on a home, and it isn’t going to help pay for a long-dreamed-of trip to Europe.
It can even be hard to think of other financial goals, or to plan for them, if you’re busy worrying about loan repayments you have to make — or, worse, if you’re watching your debt balance grow and grow. Yikes.
No. 2: Debt probably costs you more than you think
It’s easy to be rather unaware of just how much your debt is costing you — especially since most of us probably really don’t want to know. Credit card debt is typically the costliest debt we carry — often because of the dreaded “penalty APR” feature that many (but not all!) cards have. A penalty APR jacks your interest rate up high if you pay just a single bill late or commit some other infraction. How high? Well, it can hike your rate to 25% or even around 30% after a single late payment. If you’re carrying $20,000 in debt and are being charged 25% on it, you’re facing $5,000 per year in interest costs alone! It can be hard to pay off your balance in such a situation.
If you’re choosing to just pay the minimum due on your bill each month, that’s also going to cost you a lot. Imagine that you owe $20,000 on your credit card(s) and that you’re being charged a 25% interest rate. If your minimum payments are 3% of your balance, you’ll start out paying a whopping $600 per month, meaning you’ll have to come up with $150 per week. If you can’t pay that, your balance will be growing, digging you deeper in debt. What if you do make that $600 payment and all future 3% payments? Well, it will take more than 30 years to pay the debt off, and your total payments will exceed $63,000 — all for a $20,000 balance owed.
No. 3: Debt is like investing — in reverse
Carrying debt is very much like investing in reverse. Instead of your investment growing in value, your balance owed can grow in value, delivering profits to the card issuer, not to you.
The stock market has averaged annual returns approaching 10% over many decades. That’s how robustly you might hope your stock market investments will grow for you over long periods. With debt, though, you’re forking over interest over and over and over — and it’s often at rates that top what you could earn in the stock market.
Paying down debt can get you guaranteed returns. If you make an extra $2,000 payment against principal on your mortgage and your loan’s interest rate is 5%, it’s like earning a 5% return on that $2,000 — because you won’t have to pay 5% on it any more. Better still, paying off something on which you’re being charged 20% interest is like earning a 20% return — a return you’d be hard-pressed to find elsewhere.
No. 4: Lowering debt can boost your credit score
A great benefit of reducing your debt load is that your credit score may rise — potentially by a lot. And the higher your credit score, the better interest rates you’ll be offered when you borrow money, which can save you many thousands of dollars. How much you owe is one component of a typical FICO credit score, and it’s the second most important one, having about a 30% influence on the score.
For a good or great credit score, aim to have a credit utilization ratio of only about 10% to 30%. Your credit utilization ratio is your total debt divided by the sum of all your credit limits. So, if you have a total credit limit of $100,000 and your total debt is $25,000, your ratio will be $25,000 divided by $100,000, or 25%. Lenders don’t want you to have maxed out your credit limits, or even to come close. (Getting your credit limits increased can also help improve the ratio. Sometimes you just have to ask your card issuer for an increase in order to get one.)
No. 5: It’s best to have minimal debt in retirement
Another perk of having paid off your debt is that come retirement, when you’re probably going to be living on less income than when you were working, you won’t have to worry about debt repayments.
Many people even try to have their mortgages paid off before retiring, in order not to have those monthly payments hanging over their heads.
No. 6: You’ll have more money
This might go without saying, but it’s worth pointing out: Once you’re done paying off your debt, you’ll have more money. Any sums that you’re forking over each month for your car loan, your mortgage, your credit card debts … those will remain in your pocket.
No. 7: You’ll have less stress and may enjoy better health
Finally, it won’t surprise you to hear that debt can cause significant stress in our lives, and paying it off can relieve that, leaving us happier and more relaxed. In surveys fully 33% of workers cite paying off debt as a cause of stress in their lives, with millennials citing debt as their top source of financial stress.
Even worse, such stress can have a negative impact on our health, as it has been linked to anxiety, depression, panic attacks, and more.
Clearly, there are gobs of reasons to start paying off your debts right now. The more debt you can retire, the better off you’re likely to be, both now and later.
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