By Ken Brossman, Senior Vice President and Regional Manager – La Crosse, Marine Credit Union
Credit cards, car loans, mortgage loans, school loans, the list can go on and on, right? Carrying debt is a burden that restricts your disposable income and puts restraints on your ability to save and spend. So pay off your debt!
Here are two different strategies:
- Pay off debts with the highest interest rates first.
By making minimum payments on debts with lower interest rates, you can put any excess income towards debts with high interest rates. Although this strategy will take more time and be less gratifying, it will save the most interest in the long run.
- Pay off your smallest balances first.
By making minimum payments on larger balances, you can put any excess income towards bills with smaller balances. With this method, you are able to eliminate individual smaller debts quicker. Once the first debt is paid off, the amount you were recently paying on the smallest bill can then be put towards the next smallest bill. This process will cause a snowball effect: with every bill you pay off, you are able to pay more towards the next bill. This approach may cost more in the long run because it doesn’t take the interest rate into consideration, but it’s more rewarding each time you reach a zero balance.
Regardless of the strategy you choose to pay off your debt, remember: always pay at least the minimum payments on all of your bills each month.
Two bonus tips:
- Factor in tax deductibility.
Some debts have tax advantages associated with the interest paid. Paying off a debt with a slightly lower interest rate without tax benefits may be more beneficial than paying off an account that is tax deductible. Always consult your tax advisor regarding the tax benefits and limitations you may have when it comes to your debts.
- Think about your future goals and what’s most important.
The future life events you have planned can also play a role in the approach you take to paying off debts. Take buying a home for example. If you are looking to improve your credit score for the best possible interest rate on a mortgage loan, you may benefit from paying off your credit cards first to improve your credit score. On the other hand, if you’re looking to increase your buying power to purchase a larger home, you may benefit from paying off the debts with the larger payments first to improve your monthly budget.
Regardless of the approach you take, paying off your debt is always a good thing as it provides financial freedom to allow you do what you would like to with your earnings instead of what you have to.