You may look at your mountain of debt and think there’s no way to get on the other side. Or, you may think the work required to get to the other side outweighs the benefits. There are some great benefits to paying off debt. The faster you get rid of debt, the sooner you get to see them.
Improving Your Credit Score
One of the best benefits of paying off debt is that you’ll improve your credit score at the same time. Two of the most important credit score factors involve paying your debts (and other bills of course). First, 35% of your credit score comes from your payment history. Paying your bills on time each month will help boost your score. Second, the amount of debt you have counts for 30% of your credit score. Having a lot of debt can hinder your credit score, but as you reduce your balances, your credit score may improve.
Don’t think because you already have enough credit cards and loans that your credit score isn’t important. It still affects major pieces of your finances, for example, your insurance rates, cell phone service availability, and security deposits on utility services. Your credit information is sometimes used for employment purposes. The same information that drives your credit score down can keep you from getting a job, a raise, or promotion.
Making timely payments on your debt is good. Combine that with a faster reduction in debt balances and your credit score can end up in its best shape ever.
The other big benefit of paying off debt is saving money. True, while you’re actively paying off debt, your ability to save money is fairly limited. But once you’ve finished paying off your debt, you’ll have several hundred dollars available each month that was previously unavailable to you. For example, consider the money you could put toward retirement or a child’s college education if your mortgage was completely repaid.
Under your current payment plan, complete debt repayment could be several years, even decades away, especially if you’re paying the minimum or just a little above it. If you could afford to put more money toward your debt, you’d free up the payment even sooner.
Paying your debt faster can save hundreds, possibly even thousands of dollars in interest. Let’s say you have $20,000 in debt at an average 14% APR. If you were currently paying $300 toward this debt each month, it would take you 10 years and 7 months to finally pay off the debt. In that time, you’d pay $17,878 in interest on top of the original $20,000. That’s assuming you never charged anything else.
Increasing your monthly payment to $400 would cut the time down to 6 years and 3 months and decrease the interest paid to $9,638.71. Paying $500 a month would reduce the payoff time to 4 years and 5 months and decrease the interest to $6,665.07. It would take some short-term sacrifice, but the long-term benefits – improving your credit score and saving thousands of dollars – are well worth it.
Take another look at your debt to see what you could save if you paid it sooner. Use a credit card repayment calculator for the complicated math. Then, use your budget to figure out how you can feasibly put more money toward your debt.
This post was written by Eliza Collins, a personal finance writer specializing in savings strategies, alternative income and debt relief options. You can read more of her articles at the debtsettlement.com blog.