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Answers to Ask the Experts “Paying off your Debt” Featuring Common Sense with Money

Now that you’re saving more with Cricket, find out how you can take that cash and chip away at outstanding debt. Our expert, Mercedes from Common Sense with Money, shared her knowledge and expert advice to help YOU become debt free.

Kinds of Debt

Is there such a thing as good and bad debt? Such as a home mortgage vs auto loan.

While we’d all probably like to live debt-free, that most likely isn’t going to happen any time soon. Buying a home, for instance, is typically a necessity for most people, yet it’s not something that we can simply write a check for.

Fortunately, not all debt is considered to be bad. Good debt would be considered debt that you have due to a large investment that you didn’t have the cash on hand for. Examples of good debt can include home loans, business loans, and student loans. Bad debt, on the other hand, is often considered to be debt incurred from purchases of non-essential items that lose value quickly or disposable items. Examples of bad debt can include auto loans and credit cards, particularly high interest credit cards.

However, this is still a bit of a gray area. If you utilize your credit well, don’t purchase more than you can afford, and pay off credit card balances quickly, I’d say you’re doing quite well!

Is there such thing as having a “healthy” amount of debt?

The “health” of the amount of debt you have is determined by your debt-to-income ratio. Your debt-to-income ratio is the amount of monthly debt you have compared to the amount of monthly income you have. You are considered to have a “healthy” amount of debt if your debt-to-income ratio is 36% or less. As your debt-to-income ratio rises, your credit can suffer.

Effects of Debt

What are the short term implications for not paying off debt?

Strictly speaking short-term, not paying off a debt will usually result in paying more than you have too. For instance, you may accrue more interest on the debt or be required to pay penalties and late fees. In some cases, not paying on a debt may put you at risk of losing your home or property.

If you’re having trouble paying off a debt, don’t ignore the problem, as this will make it worse in most cases. Create a strict budget and cut out any unnecessary expenses. Contact your creditors as well, and let them know about your situation. Some creditors may be willing to work with you, such as by setting up a reasonable payment plan.

How does this affect my credit score and why does that matter?

There are several factors that affect your credit score. Some of these factors carry more weight than others.

Your payment history and the amount you owe are the two biggest factors that affect your credit score. Late payments, charge-offs, bankruptcy, collections, judgments and excessive debt will lower your credit score more than any other factor. The length of your credit history, the types of credit you have, and new credit on your credit report can also affect your credit score. A longer credit history and a good mix of different types of credit accounts are better for your credit score. Finally, opening several new credit accounts in a short period of time can cause your credit score to drop slightly.

Your credit score matters for several reasons. Your credit score can affect your ability to get a line of credit or a loan and be a determining factor in your interest rates. A lower credit score could also result in you having to pay a security deposit for utility services, and more and more employers are using a person’s credit as a deciding factor on whether or not to hire them.

Managing Debt

I still have a student loan. Should I pay it off big sums of it at once if I have the funds or keep it and continuously pay it off over time?

Since I don’t know more about your personal financial situation, this can be a difficult question to answer. I’ll do my best though.

Basically, you have a couple of different options here. First, you can pay off big sums of it all at once, but only if you have the means to do so. By doing this, you’ll pay less in interest over the course of the loan and pay off the loan early. Second, you can continue to pay it off over time and put those big sums into savings instead. You may pay a little more in interest and pay a little longer on your student loan; you should have a nice big chunk of money in a savings account for emergencies or retirement.

What percentage of much of my monthly income should I dedicate to paying off debt?

Aim to dedicate only 36% or less of your monthly income to paying off debt. If you have a high amount of debt or a high debt-to-income ratio, you may want to dedicate more of your monthly income to paying off your debt, if possible.

When prioritizing what debt to pay off first, what factors should I consider (interest rate, total amount, how long I’ve owed, etc.)?

This will depend on your personal situation, but paying the debts with the highest interest rates first is usually the best tactic, since you’ll pay much less in the long run. Every month, pay as much extra as you can on your high interest debts. If you can only focus on paying off one debt at a time, focus on paying the one with the highest interest rate first, move on to the one with the second highest interest rate next, and so on.

If you feel overwhelmed with the amount of debt you have, though, you can try the debt snowball method. This requires you to tackle the smallest debts first and work your way up to your largest debts.

On the other hand, if you’re in a very bad financial situation, you should focus on the necessities first. This includes your mortgage payments, since you need a place to live, and auto loans if you need your vehicle for work. Don’t ignore your other debts, though. Do what you can to pay them, but never put your home or livelihood in jeopardy.

I have credit card debt and loans; which should I be paying off first?

Focus on paying off the debts with the highest interest rates first. Chances are these are credit cards. Paying off your revolving debt – credit cards, for example – can also give your credit score a boost and give you more available credit. Think twice before closing a credit card account after paying it off, however, since this can actually ding your credit score slightly.

I don’t have an emergency fund. Should I be putting money into savings or trying to pay off my debt?

Most financial experts would agree that paying off high interest debt should take precedence over saving. Interest rates for savings are generally very low, and high interest rates can cost you big bucks in the long run.

Unfortunately, it isn’t always so cut and dried. Everyone’s situations and financial goals are different, and there are pros and cons to both approaches. If you pay off debt before saving, you’ll pay less in interest, but you won’t have a large emergency fund or nest egg. If you focus on saving, however, you’ll pay more in interest but have an accessible stash of cash when you need it.

What would i do? I say do both, if you can swing it. Pay yourself first, directly from your paycheck each week or month, even if it’s just a tiny percentage of your income. Even a little money in savings is better than nothing.

Apps & Resources 

Are there any mobile apps you recommend for managing your debt?

There are so many mobile apps out there; it’s difficult to choose just one! The right app to manage your own debt may not be the right app to help your neighbor manage his debt, since everyone’s financial goals and situations are different. I recommend trying out a few different free debt management apps first before settling on just one.

With that being said, I would recommend giving the Mint app a shot, which is available for Apple and Android. This app lets you see all of your financial accounts in one place and allows you to create a budget, track your spending, and get upcoming bill reminders.