Recently an article came out saying that debt was at the highest levels ever in history.
I can understand why…because interest rates have been low for a very long time.
That means money has been cheap. At least mortgage money has, but credit card
rates are very high.
Now is a good time to review your debt and make some good decisions.
First of all, understand not all debt is bad.
What’s not good is using debt for items that lose value. Using debt for things that
increase in value can be a smart move.
Like buying a home. Mortgage debt is good debt, in my opinion.
The interest rate banks charge on mortgages are the lowest rates of any debt you have
because you’re least likely to walk away from your home.
Interest rates are the price of money and rates have been rising for over a year
However, the Federal Reserve just said that interest rates may have to rise faster
than they have been.
They hinted at rates going up 4 times this year, a quarter or half of one percent
That could be an additional 1% or 2% higher in interest rates you pay on debt.
Here are some things to think about:
1. If you have a variable rate home loan, refinance your mortgage to a 30 year fixed interest rate. That will keep your payments the same even if interest rates rise.
2. Pay off credit card debt and other high interest rate debt. It is your most expensive debt.
If you pay off the debt with the highest credit usage to credit available, it will also improve
your credit score.
For example, if you have debt on two credit cards, one has debt of $1,000 out of a total credit line available of $5,000 and the other card has debt of $800 out of a total credit line of $2,000. Calculate your debt to credit ratio by placing the amount of debt owed divided by your total credit available, so:
Card #1: $1,000/$5,000 = 20%
Card #2: $1800/$2,000 = 90%
Card #2 has the highest debt to usage ratio because you’ve used up almost all of your credit. Your credit score will be reduced because of this.
If you pay down the balance on Card #2, you will also improve your credit score by lowering the debt ratio.
I also suggest you pay off higher interest rates first, to save more money.
3. This is an easy tip I’ve done for years and highly recommend: Pay a little extra on your
mortgage each month.
Paying 1/12 extra on your mortgage every month is the equivalent of paying one extra payment per year. That will save you thousands of dollars in interest and pay off your mortgage early.
For example, if your mortgage payment is $1200 per month, 1/12 is $100. Pay an extra $100, or $1,300 a month, and at the end of the year you will have made one extra payment.
There is usually no charge to do this and you will often cut your 30 year mortgage down by 7 years and save thousands of dollars in interest.
Of course, it’s best to get rid of debt (besides your mortgage) as soon as you can, especially if
it is debt that becomes more expensive when interest rates rise.
Understand the skillful use of debt and use it to your advantage.