Debt (and plenty of it) is the predominant way of life for millions and millions of Americans. Good, bad or indifferent, it is the mode of operation for most of us. That simple fact is the primary reason why the current "credit crisis" is as severe and wide-reaching as it is. Whether you are carrying a little bit of debt or so much that you are struggling to make the payments, there are some good reasons for paying it off sooner rather than later.
REASON #1: Things may get worse before they get better. The job market is bad; gas prices are rising (almost by the hour); and food prices are getting higher each day. Carrying debt adds yet another variable to those financial pressures that are not going away any time in the forseeable future. Have less debt provides greater flexibility (even if it's just a little breathing room) during the economic downturn.
REASON #2: Credit scores are more important than ever. Because of the billions of dollars of losses from defaulted loans, lenders are becoming stricter about extending credit. They are starting to pay much closer attention to who they give credit to and the liklihood that the money will be repaid. An important component of your credit score is determined by the amount of credit you have available and the balance you owe. The more "unused credit" you maintain, the better risk you appear to be. That will help your credit score go up. In turn, your interest rate for borrowing money is more likely to go down.
REASON #3: It's more expensive to pay interest than it is to earn it. This is an easy one...if you are earning 2% on the cash you have sitting in a savings account but you are paying 16% interest on a balance you are carrying on a credit card, you are LOSING MONEY! If you are not paying interest on borrowed money (i.e. no debt), ANYTHING you earn will be profit, regardless of whether the interest is high, low or just mediocre.
REASON #4: Having cash in hand means having financial control. For so many reasons, cash is more desirable than any form of credit. It gives you power to negotiate. It doesn't cost anything to complete a cash transaction. It's flexible and it's immediate. Debt takes control out of your hands and puts it in the hands of everyone BUT you (boss, lender, sales people, etc.). The sooner you significantly reduce or eliminate your debt, the sooner you will have cash in hand and total control of your finances.
REASON #5: It provides a great psychological boost (and a little momentum too). The
"debt snowball" technique involves listing debts from lowest balance to highest and paying them off in that order. Mathematically, that technique may be more expensive. Why would anyone suggest that method then? Simply because paying off something, anything provides a quick dose of confidence and encouragement. Chances are, people with multiple debts will be able to pay off the smallest one pretty quickly and that will give them to momentum to move on to the next one. Think about your own finances. If you had a debt that you could get rid of once and for all within the next 2-4 paychecks, would that make you feel like your overall mountain of debt could be conquered? Would it give you incentive to make the sacrifices you need to make to pay it off as quickly as possible? If the answer is "yes", you prove the point!
REASON #6: Your financial foundation will be stronger without it. Whether you need to save for education expenses, business expenses or your future retirement, debt limits the time and money you have available to do those things. In fact, it could be argued that your financial foundation isn't laid until your debt is gone for good. The uncertainty surrounding the economy, in general, and specific programs like
Medicare,
Social Security and
Federal Student Loans should be plenty of incentive to eliminate your debt so you can save as much cash as possible for someday.
Unless you are extremely unusual, you are carrying some amount of debt right now. Regardless of the amount, that debt is holding you hostage financially. You cannot do all the things that you want and need to do with your money unless and until that debt is gone. There is no good reason to drag the payments out any longer than you have to. Pay off that debt ASAP and get your money busy working for you instead of the people that loaned you money to start with.
