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6 Reasons Why You Should Start Paying Off Your Debt Now – The Fool Motley



If you are not comfortable with the amount of your debt, you are not alone. According to Northwest Mutual's 2018 Planning and Progress study, only 23% of Americans say they have no debt. And among indebted people, the average burden of personal debt (excluding mortgages) was $ 38,000.

Fortunately you can succeed in paying a lot of debt. Here are six compelling reasons why you should make crushing a high interest rate debt a priority.

A man in a suit is chained to a huge black ball bigger than him.

Source of the image: Getty Images.

# 1: It's hard to reach financial goals

Here is one of the main reasons why you need to pay off your debt – at least your high interest rate debt – pronto: Carrying a large amount of debt can make your financial goals unattainable and ultimately annihilate your dreams. If you want to accumulate a large war chest for retirement, put your children in school or save for a down payment on a house, it can be difficult, if not impossible, to make payments on all the money you owe.

Here's an example: imagine that you save $ 500 a month and use it to pay your debts. This type of money – $ 6,000 a year – could increase for you if you are not in debt. If he was invested an average of 8% per year over 25 years, he would reach about $ 473,000!

# 2: You can enjoy a higher credit score

Many people underestimate how important their credit score is. But this three-digit number can make a big difference in your financial life, for example when you want to take out a mortgage.

Check out the chart below, which indicates the kind of difference that a high credit score can make. It reflects the recent interest rates of a person borrowing $ 200,000 via a 30-year fixed rate mortgage and shows that there is a huge difference of $ 66,722 between the total interest paid on the interest rates offered to people with the highest credit scores and the lowest scores.

FICO score

APR

Monthly payment

Total interest paid

760-850

3.4%

$ 887

$ 119,306

700-759

3,622%

$ 912

$ 128,235

680-699

3,799%

$ 932

$ 135,448

660-679

4.013%

$ 956

$ 144,279

640-659

4,443%

$ 1,007

$ 162,379

620-639

4.998%

$ 1,072

$ 186,028

Source: MyFICO.com, as of July 9, 2019. APR = annual percentage rate of charge.

So, what does it have to do with your debt? Well, your debt is one of the elements of a typical FICO credit score, and this is the second most important factor, with an influence of around 30% on the score.

For a good or good credit score, aim for a credit utilization rate (your total debt divided by the sum of all your credit limits) from 10% to 30% only. Lenders do not want you to exceed your credit limits, or even to approach them. (Increasing your credit limits can also improve the ratio, sometimes you just need to ask your card issuer for an increase to get one.)


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# 3: Debt is much more expensive than you think

When you send payments on the debt you owe, it is easy to assume that most, if not all, of your debt is owing. But a good part of it only reaches the interest.

Imagine that you owe $ 20,000 on your credit card and are billed at a 25% interest rate. If your minimum payments are 3% of your balance, you will start paying $ 600 a month, which means you will have to pay $ 150 a week. If you can not pay that, your balance will increase, digging you deeper into debt.

And if you make make this payment of $ 600 and all future payments of 3%? According to an online calculator, the debt repayment will take more than 30 years and the total of your payments will exceed $ 63,000, all for a balance of $ 20,000.

Credit card debt is usually the most expensive debt we have – often because of the dreaded "APR" feature of many cards. A fine APR violates your interest rate up to 25%, or even 30%, if you pay a single late bill or if you commit another offense.

If you have a debt of $ 20,000 and you pay 25%, you only pay $ 5,000 a year in interest! It can be difficult to pay your balance in such a situation – or to make financial progress. (Some credit cards do not have a TAP, so always favor those that are not when you buy cards.)

We see a piggy bank half immersed in the water and with an unhappy expression.

Source of the image: Getty Images.

No. 4: You do not want to enter a debt-laden retirement

Many people want to retire without a mortgage. This is a reasonable goal you could achieve if you settled your debts in the years to come. Retirement can be quite difficult financially – if you can clear your debts and pay off your mortgage, you will have fewer worries and will be able to spend more of that fixed income on activities such as food, travel and leisure (and health care, insurance, taxes and things like that.)

# 5: Little to no debt can mean less stress and better health

Here's another great reason to pay off your debt as soon as possible: it can make you more relaxed and happier.

It is probably obvious that having a lot of credit card debt can be stressful, especially if you are charged high interest rates. But other types of debt also have adverse consequences. More than 7 million Americans were making late payments on their auto loans at the end of 2018 by the New York Federal Reserve, and a survey commissioned by Fair.com revealed that auto loans were a source of significant stress and anxiety. The car loan is more stressful than looking for a new job and 22% say that automobile debt has a negative effect on their mental or emotional health.

According to a 2018 survey by Fidelity Investments, 33% of workers felt that repaying their debt was a source of stress in their lives. According to a survey conducted by Student Loan Loo, millenarians view debt as their main source of financial stress. Debt has been linked to anxiety, depression and panic attacks and it is often a favorite subject for which couples quarrel. Pay off your debt and you will have a lot less worries.

No. 6: You will be richer!

Finally, it may be obvious, but it is an important and powerful motivator: once you have repaid your debt – at least your non-mortgage debt – you will have more money. You will not spend those dollars every month on auto loans, student loans and credit card debt. Instead, they will stay with you – and they can be spared savings and investments that will help you achieve various goals.

The sooner you pay off your debts, the better it is, and for many reasons.


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