Getting Rid of Bad Debt

Getting Rid of Bad Debt

Debt reduction strategies

Let me be the first to tell you, debt isn’t the devil.  When used correctly, debt can be a tool to generate wealth.  But high interest debt, i.e. from credit cards, acts in reverse.  It keeps you broke.

Here is an example of what someones 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
Car Loan $17,000.00 6% $330.00
Mortgage $240,000.00 3.50% $1,078.00

 

Someone might say, look, get rid of the mortgage and you’ll save a ton of interest.  Yes, but the mortgage is an important loan it is secured, i.e. it is 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 cash back.  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).

 

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