How Paying Off Debt Sets You Up for Financial Success
Everyone is trying to spend less and save more, but the key to financial success depends what you’re spending on. Financial experts agree the key to success is paying down debt – but where do you start? Last holiday season, American consumers added an average of $1,325 in credit card debt. Credit card debt typically carries a higher interest rate than auto loans or student loans, thus costing you more over time if you carry a balance.
The amount of debt you have and your debt repayment habits influence your ability to qualify for a mortgage loan or other line of credit. Lenders use your debt-to-income ratio to evaluate whether or not you can take on additional debt. Missed and late payments will also hurt your credit score. Debt can be a major obstacle to achieving other financial goals, including buying a home. The average American household owes nearly $7,000 in monthly credit card debt, a balance that if left unpaid can accumulate upwards of $1,100 in interest each year.
If you’re trying to buy a home or qualify for another type of loan or line of credit, you may want to consider paying down your debt first. Here are some of the most successful ways to pay down debt.
Make a Repayment Plan
When beginning to tackle your debt, you may decide to use the “avalanche” method or the “snowball” method.
With the avalanche method, you pay off your higher-interest debt first and then work your way to the lower-interest debt. This method may be right for you if you have more high-interest debt than low-interest debt, or if some of your debt has a substantially higher interest rate than your other debt.
With the snowball method, you pay off your account with the smallest balance first, regardless of the rate of interest, and then work your way through your other debts. This method may work best if your accounts carry similar rates of interest and can help you build momentum to pay down your balances.
Consider reviewing your debt with a financial advisor to establish a repayment plan.
Use a Balance Transfer
In some instances, you may be able to transfer a high-interest balance to a credit card with a lower-interest balance. Some cards may even have special introductory offers with no interest for a year or more.
You may also want to look into debt consolidation through a personal loan. Personal loans typically have a lower interest rate than credit cards.
Talk with Your Credit Card Company
If you feel especially burdened by your high-interest debt, you may wish to reach out to your credit card company and request a lower interest rate. Many consumers haven’t even considered going directly to the source. According to CompareCards.com, 3/4 of consumers who reached out to their cardholder were able to negotiate a lower interest rate, as much as 5 to 6 percentage points lower.
If you’re planning to buy a new home or refinance your current mortgage, you should talk with a loan officer about your debt. We can help evaluate your situation and let you know how paying off your debt will impact your ability to qualify for a loan.