Being in debt is not very fun. And it can also be a big financial disaster, depending on your debt and the type of debt you have. The good news is that there are proven methods to pay off the debt – but the bad news is that you need to be serious about debt repayment if you really want to get out of debt.
If you are not currently working on a debt repayment plan, here are four good reasons why you should definitely start repaying your debt now.
1. You are wasting money on interest
Debt is almost never free – you have to pay interest when you borrow. These interest charges can really add up, especially if you only pay the minimum on credit card payments. In fact, if you borrowed $ 5,000 on a card at a 15% interest rate and paid a minimum payment equal to the lesser of 2% of your balance or $ 10, you would end up paying $ 7,789.37. ‘interests. And you would pay this balance over more than three decades!
Although this is an extreme example, interest is almost always expensive on consumer debt. Even a $ 30,000 to 4% mortgage loan paid back over 60 months would cost you more than $ 3,000 in interest. That’s more than 10% of the cost of the car, if you financed the full purchase price. The more debt you carry, the higher the interest rate, the more you will pay over time.
If you do not want every purchase to cost more, try to pay off your debt as soon as possible. After all, do you have better things to do with thousands of dollars than sending money to banks or credit card companies?
2. Your debt makes money management more difficult
Most debts are paid on a monthly basis. When you have credit card bills, auto loans, student loans, personal loans and other debts to pay, all of these monthly payments are a significant percentage of your salary. This leaves you less money to do other things – like buying essentials, saving for college or retirement, or working toward financial goals such as buying a home.
If you could repay your creditors, you would have all that money you sent to pay your debts. For example, a $ 30,000 auto loan at a 4% interest rate over 60 months would cost you about $ 552 a month. If you invested $ 552 a month for 30 years instead of sending it to a car loan lender, you would end up with more than $ 670,000 if you realized a return on investment of 7%. This is a nice retirement pledge that you could build if you were not stuck sending this money to a lender every month.
3. Your debt is dragging your credit score
When your credit score is determined, your credit utilization rate is taken into account. This is the amount of credit you used against the credit you have. A person with a balance of $ 1,000 and a credit limit of $ 10,000 uses 10% of the available credit. Its credit utilization rate is therefore 10%.
A credit utilization rate greater than 30% is a red flag because it indicates that you may be in debt and can not manage your payments effectively. On the other hand, a lower utilization rate can significantly increase your score. By working on the repayment of credit card debt, you can reduce your credit usage rate and your credit score should increase as a result of your efforts.
Your history of one-time payments you make when working on debt repayments should also help you get a better credit score. And, since employers can check your credit with car insurers and other companies with whom you do business, it is very important to have a good credit rating.
4. Your debt could make borrowing more difficult for important things
Although you want to borrow as little as you can to avoid having to pay interest, you may need to borrow – and that even has financial meaning.
If you have to borrow to grow a business or pay for a college, this investment in yourself could pay off by dramatically increasing your income. And most people need to borrow to buy a house, which can be a good thing, because homeowners usually have a higher net worth than tenants.
Unfortunately, if you have a lot of debt, it will be more difficult to get loans approved that will help you achieve laudable goals. Indeed, most lenders examine your debt ratio, which is calculated on the basis of your debt to your income. An excessively high debt-to-income ratio may result in a loan denial or a higher interest rate if you are allowed to borrow.
By paying off your debt, you can reduce your debt ratio so that lenders consider you to be a less risky borrower. This would allow you to get loans in good conditions when you really need it.
Start working on your debt repayment plan today
As you can see, working on debt repayment is very important – and it’s not something that can wait. So, prepare a plan today to put more money into paying down the debt; Determine which debts you want to pay first; and start working to become debt free. When you reach your goal, you will be very happy to have made the effort, especially when you start doing great things with all the money you save in interest.