How To- Consider More Than Just Paying Off Debt

Yesterday, I wrote about the scoring system. In general, you will want to pay off the debts with the lowest score first. However, you will want to consider these items as well…

1. Could the money be used better elsewhere?
Yes, you could pay off your mortgage OR you could invest that money in something that has a greater rate of return. Let’s say your mortgage has 3% interest. If you had an investment opportunity that offers a 7% rate of return, you would net a 4% gain on your investment.

2. Will paying off that credit card actually HURT your credit?
Sometimes, if your credit score is low enough or your payment history poor enough, credit card companies will reduce your available credit as you pay your balance down or even close your credit card when you pay off the balance. When this happens it negatively impacts your score.
While you cannot completely trick the credit card company, paying slowly and consistently over time is less likely to trigger your account than paying more quickly.
Remember, your total available credit is a large part of your credit score. Closing a card or reducing the credit available will reduce your total available credit.

3. Do you have at least $1,000 in savings?
Yes, you could consider the available credit on your credit card to be your emergency savings account. But, what if your emergency does not accept credit cards?
It is always a good idea to have at least $1,000 in savings. You can decide from there whether you want to increase savings or decrease the credit card balances (or you can go with the Ben Franklin answer here and say “the best is to do both!”).

4. Are you investing in yourself?
The best investment you can make is in yourself. So, while paying down that debt can save you hundreds… or even thousands… in interest, do not cost yourself even more by not improving your mind, body, and spirit.
Additionally, if you have not done the mind work to change the thoughts, beliefs, or habits that got you into debt, you will probably find yourself back there soon. This is why the majority of lottery winners find themselves broke again within 3-5 years.

5. Are you paying down strategically?
Studies show that 95% of what we do is subconscious and emotional. Take a good look at your plan and ask WHY you are making these decisions. Go deeper if you are not sure or if it is “because it is how it has always been done”.

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