In America, paying down debt is a rite of passage. Most of us at one point or another have felt the suffocating effects of too much debt. Deleveraging can be a long and complicated process, but it’s necessary if we want to achieve personal financial success. Not all debt is bad, but here are a couple of indicators that point towards a possible credit issue:
- Continual revolving balances on credit cards. Maintaining a credit card balance creates unnecessary interest expenses and can drag you away from your intended financial goals.
- Credit score below your target. Your credit score improves when you demonstrate the ability to effectively pay down debt. If your FICO score is below 720, you should take a serious look at your credit balances.
In my experience, financially fit people keep personal debt to a minimum. Ideally, we only incur debt when we have the money to pay cash but it makes good financial sense to use credit instead. For example:
- Borrowing against appreciating assets like a home or commercial property. When an asset we borrow against increases in value, our wealth accelerates. Conversely, the opposite is true when we incur debt on depreciating assets!
- Borrowing at rates below investment returns. For example, you expect to make 6% in your investment account and the bank is offering 1.99% to finance a new vehicle. Instead of cashing out of your investments, you should consider the low interest rate car loan.
Whenever I make recommendations on debt for a client, there is some important information on each credit item that must be compiled:
- Interest Rate – This is the rate of interest your creditor is charging.
- Payoff or Loan Balance – This is the total current amount you owe this creditor.
- Minimum Payment Due – Usually there is a minimum payment due each month.
- Months Remaining – How many more months of minimum payments it will take to extinguish the debt.
Once all of this information is compiled, the factors can be compared to each other to prioritize payoff. It’s important to concentrate on the the highest priority payoff first, and work down to the lower priority credit items.
I have discovered over the years, prioritizing debt payments is not as clear cut as it may appear. It’s too hard to explain the analysis process so if you want assistance, I am happy to help at no obligation. If you fill out the the form provided in the link below, I will analyze your debt for you and provide feedback and comments. I am not charging for my analysis because it’s something I can complete very quickly if you provide complete information. I’m happy to do this, and will do the analysis for anyone you provide with this link:
Compiling all of the pertinent information on your credit balances and getting an analysis done can be the difference maker between making significant progress or letting another year slip by. Just about everyone has found themselves staring at too much debt at some point. If I can provide some help to you or someone you know, please click or share the link to my analysis form.
Rob.
