Getting Rid of Bad Debt
Let me be the first to tell you, it’s imperative to know the difference between good debt, bad debt and how to get rid of it. To be sure, debt on its own isn’t the devil. When used correctly, debt can be a wealth-generating tool that pays you back for a lifetime. But, high-interest debt, i.e. from credit cards, acts in reverse. You see, it keeps you broke.
Here is an example of what someone’s debt load might look like:
|Amount Owing||Interest Rate||Monthly Payment|
|Credit Card A||$10,000.00||19.90%||$100.00|
|Credit Card B||$4,000.00||19.90%||$80.00|
|Credit Card C||$5,000.00||17%||$100.00|
Some might say, look, get rid of the mortgage and you’ll save a ton of interest. Yes, but the mortgage is good debt, as it’s secured, i.e. it’s tied to an asset. The interest rate is also very low, making it a cheap source of funds. Mortgage debt is good debt as the cheap source of funds allows you to invest your excess funds- which is the key to becoming financially independent!
Further, as a mortgage is a secured loan, if sh*t really did hit the fan, you could sell your home, and pay off the mortgage (and hopefully keep any remaining equity).
By contract, you probably can’t say the same about your credit card, or perhaps not even your car loan as many car loans are “underwater”, meaning the loan exceeds the value of the car for many years.
So what to do? Work to pay off those credit cards as fast as possible. Start with the one with the lowest balance (Credit Card B). Then take the monthly payment that you would have applied towards Credit Card B, and put it towards the Credit Card C. And when that one is paid, finish with the last card.
Does it mean you shouldn’t use a credit card? No. By all means, use a credit card that gives you some nice perks, i.e. credit card points, or cashback. But pay it off every single month, in full! The interest on those cards is just killer, so why not pay it off?
What about the car loan and the mortgage? If you absolutely need the car, keep it. But pay it off fast. As fast as possible. That car payment could be used to invest in yourself, in a rental property, a side hustle, or your retirement (stocks).