Dump Debt Sooner
Few things both make you feel good and improve your financial situation as
much as paying off debt! The sooner you can shut off those debt faucets, the
longer your income pipeline will stay filled.
Reduce your rates
Your first step in dealing with existing debt is seeking to reduce your interest
rates. Here’s how:
- You may have gotten your home mortgage when rates were much higher —
check on the rate you can get by refinancing.
- Call your credit card companies and ask for a lower rate. Tell them
about lower-rate offers you’ve gotten in the mail. Do this at least once a
year.
- Check with your bank or credit union to see whether you can refinance
your car loan at a lower rate. Consider the cost of refinancing and
whether it’s worth the lower payment you may get.
When checking on lower-rate refinancing, ask the same questions about
terms and prepayment penalties that you would when looking for good debt.
Accelerate your payments
As soon as you’re paying the lowest rates available, you want to start accelerating
debt payments to get out of debt sooner. Whether it’s old bad debt
you got before reading this book or good debt, the less interest you pay, the
better. The order in which you eliminate your debts depends on the type of
account and how its interest is calculated.
Here’s the usual priority order for paying off debt:
1. Credit cards and other revolving consumer accounts
2. Auto, furniture, and appliance loans
3. Boat and RV loans
4. Home equity loans
5. Home equity lines of credit (HELOC)
6. Student loans
7. Home mortgages
You can most efficiently pay off your debts by applying any extra amount to
just one account at a time (usually the one with the highest interest rate and
smallest balance). As soon as that first account is paid off, accelerate payments
on account number 2 by applying the full amount you’d been paying
on account number 1 (basic payment plus the extra amount). As each debt is
paid off, keep rolling the full amount being paid to the next debt account.
You can find a free debt-reduction calculator that helps you see how much
interest you’ll save and helps you pick which debt to pay off first at www·whatsthecost·com — it lets you do calculations in U.S. dollars, euros, or
British pounds.
As soon as a credit card account is paid off, don’t close it — just cut up the
card. Closing an account you’ve paid off hurts your credit score by reducing
the total amount of credit you have available.
