Spring Cleaning Your Debt
It's springtime--time for you to take stock of your
surroundings and get rid of the dirt and clutter that you've accumulated during
this past year.
In addition to typical spring cleaning tasks, you may want
to take this time to focus on your finances. In particular, now may be
as good a time as ever to evaluate your debt situation and try to reduce and/or
eliminate any debt obligations you may have. The following are some tips to get
Determine whether it makes sense to refinance
If you currently have consumer loans, such as a mortgage or
an auto loan, take a look at your interest rates. If you find that you are
paying higher-than-average interest rates, you may want to consider
refinancing. Refinancing to a lower interest rate can result in lower monthly
payments on a loan and potentially less interest paid over the loan's term.
Keep in mind that refinancing often involves its own costs
(e.g., points and closing costs for mortgage loans), and you should factor them
into your calculations of how much refinancing might save you.
Consider loan consolidation
Loan consolidation involves rolling small individual loans
into one larger loan, allowing you to make only one monthly payment instead of
Consolidating your loans into one single loan has several
advantages, including making it easier to focus on paying down your debt. In
addition, you may be able to get a lower interest rate or extend the loan term
on a consolidated loan. Keep in mind, however, that if you do extend the
repayment term on a consolidated loan, it could take you longer to get out of
debt and ultimately you may end up paying more in interest charges over the
life of the loan.
Look into taking out a home equity loan
If you own a home and have enough equity, you may be able to
use a home equity loan to pay off your debt. The interest on home equity loans
is often lower compared to other types of loans (e.g., credit cards) and is
usually tax deductible.
Home equity loans can be an effective way to pay off debt.
However, there are some disadvantages to consider. If you end up having an
available line of credit with a home equity loan, you'll need to be careful not
to incur any new debt. In addition, when you take out a home equity
loan, your home is potentially at risk since it serves as collateral for the
Evaluate whether you should invest your money or pay
off your debt
Another effective way to reduce your debt load is to take
cash that you normally would put toward certain investment vehicles and use it
to pay down your debt. In order to determine whether this is a good option,
you'll have to compare the current and anticipated rate of return on your
investments with interest you would pay on your debt. In general, if you would
earn less on your investments than you would pay in interest on your debts,
using your extra cash to pay off your debt may be the smarter choice.
For example, assume that you have $1,000 in a savings
account that earns an annual rate of return of 3%. Meanwhile, you have a credit
card balance of $1,000 that incurs annual interest at a rate of 19%. Over the
course of a year, your savings account earns $30 interest while your credit card
costs you $190 in interest. In this case, it might be best to use your extra
cash to pay down your high-interest credit card debt.
Come up with a payment strategy to eliminate credit
If you have a significant amount of credit card debt, you'll
need to come up with a payment strategy in order to help eliminate it. Some
- Making lump-sum payments using available funds such as an
inheritance or employment bonus
- Prioritizing repayments toward cards with the highest
- Utilizing balance transfers
Whenever possible, make additional payments
Making payments in addition to your regular loan payments or
the minimum payment due can reduce the length of the loan and the total
interest paid over the life of a loan. Additional payments can be made
periodically and at a time of your choosing (e.g., monthly, quarterly, or
Making more than the required minimum payment is especially
important when it comes to credit card debt. If you only make the minimum
payment on a credit card, you'll continue to carry the bulk of your balance
forward for many years without actually reducing your overall balance.