Why You Should Pay Off Debt Before Saving
For many people that are living paycheck to paycheck, paying off debt or saving some money are not available choices. If you are struggling to meet your monthly bills, your options are limited. But the ultimate goal is to get to a situation when you are earning more than enough to cover your outgoings. For most of us, if we can get to that stage, we will have accumulated our share of debt and may not have been able to save much. So, what should be your priority?
Financial experts aren’t always clear on this, and much will depend on circumstances. But as the experts at fat cat debt help will tell you, the best option is usually to tackle the debt problem first before you consider adding to your savings. Nobody likes to carry debt through life, but there are even more significant reasons to tackle debt as a priority:
Interest
Most people who have credit cards pay off the interest on their cards on a monthly basis, but the rate of interest can be 20 % or higher. Debt with a high interest rate can be hard to pay down particularly if you get into the habit of just paying the monthly minimum, as a large proportion of the payment goes towards the interest charges, not the underlying debt.
For example, imagine you have a credit card with an interest rate of 22% interest rate. If the balance on your card is $5,000 and you make the minimum monthly payment of $141 every month, it will take 281 months to pay off the full amount, and over that period, you will end up paying over $8,000 in interest alone. But, let’s say you have $500 to spare every month, and you use that to pay towards your credit card debt, you will be able to eliminate that entire debt in around one year, paying around $541 in interest, saving up to $7,500.
Credit Score
If you want to improve your credit score, perhaps because you are planning to take out a mortgage or a car loan, paying off your debts can help.
The amount that you owe on your credit card and loans will make a significant contribution to your FICO credit score; as much as 30%, but your record of savings has no impact on your credit score. By paying off your debt as a priority rather than saving, you will be boosting your credit score, making it easier for you to get good deals on mortgages and loans.
Peace of Mind
The final reason for prioritizing debt is to alleviate the anxiety and pressure that can come with owing thousands of dollars, not to mention the psychological pain of having to pay the interest on that debt. By tackling and paying down your debt, you will not only improve your long-term financial prospects, you will also remove some of that pressure, and set yourself on the right path towards prosperity.
