Debt costs money. As obvious as this sounds, many people
don't realize that their debt is costing them a lot of money.
People do realize that their debt stresses them out and restricts
their spending activities, but they don't tend to think about the fact
that they are paying to have debt. In fact, people essentially buy
debt all the time.
The reason debt costs money is the interest rates.
Interest is the price you pay to have money that you don't actually
own. A lender receives an amount of interest as compensation
for lending money. Interest rates are expressed as a percentage
over a period of one year.
When you get a mortgage for a property, your mortgage loan has
an interest rate. When you sign up for a credit card, the card
comes with a standard interest rate that you will pay on anything
you charge to the card. When you get a line of credit, you are also
agreeing to pay the interest on any money you withdraw.
Essentially, you are paying for the debt.
As interest rates rise, consumers will pay more and more for
their debts, especially if they have a variable mortgage or a line
of credit. And some debts are more expensive than others.
Fortunately, there are some ways to reduce the amount of money
you spend on debt each year.
- 1. You can make accelerated debt payments and attempt to
pay your debt off more quickly. This will ultimately save you
thousands of dollars in interest payments. To find out how
much you stand to save by making additional loan payments,
try this simple mortgage calculator. Pay off the debt with the
highest interest rate first. This is the most costly debt.
Usually this includes any credit cards you have.
- 2. Pay attention to your credit card contracts. Legally, your
credit card company must only give you 15 days written
notice before raising the interest rate. Consider transferring
your balance to a card with a lower interest rate. Look for
cards that promise a lower rate for a specific period of time. It
can be prudent to switch cards as low-interest introductory
periods expire.
- 3. If you have a line of credit, consider switching it to a loan if
interest rates are expected to rise. The interest rates on lines
of credit are tied to prime rates, so if rates rise your interest
payments will increase as well. With a fixed interest rate loan
your interest rate will be secured.
- 4. If interest rates are rising and you have an adjustable rate
mortgage, consider refinancing into a fixed rate mortgage.
This isn't wise if you are planning on selling your home
shortly, because you will have to pay a penalty for refinancing.
Yes, debt is a four letter word, but it doesn't have to spell disaster
for you. Be smart about debt management and set both short
and long term goals for reducing debt. With persistence, you
can reach your goal of becoming debt free.
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