Credit

Americans today owe more money than ever before. The fact that ‘interest never sleeps’ means that the situation will continue to worsen unless steps are taken at the individual level to reduce or eliminate debt.

When you receive some extra money it may be difficult to determine whether you should invest the funds or use them to pay towards liabilities. Financial theory recommends that if your after-tax return on investments is greater than your after-tax cost of debt then you should invest.

You might realize significant monthly interest savings by transferring your higher rate credit card balances to a lower rate credit card.

Although credit scores are calculated differently by the various credit bureaus, you can get an estimate of what your score may be by using this calculator. The three main things that help you have a good credit score are first, having a long history of making all debt payments on time, second using the proper mix of credit, and third not maxing out on available credit.

By making consistent regular payments toward debt service you will eventually pay off your loan.

The loan amount, the interest rate, and the term of the loan can have a dramatic effect on the total amount you will eventually pay on a loan.

How much debt is too much?

If you know your current payment, the interest rate and the term remaining, you can calculate your outstanding loan balance.

With interest rates at historical lows, it may make sense to consolidate some of your credit card and other personal debt into a new consolidated loan, typically a home-equity loan. Consolidation loans can significantly reduce your required monthly payment because they are generally amortized over 10 or 15 years.

The quickest way to retire your debt is to 1) determine what your total debt payment is now, then 2) sort your debts from highest interest rate to lowest, then 3) continue to make the same total payment amount except pay Minimum Payments on all debts except the highest rate debt, then 4) once the highest rate debt is paid off apply those new savings to the next highest rate debt and so on.

Use this calculator to help determine whether you are better off receiving a lump sum payment and investing it yourself or receiving equal payments over time from a third party.

Over the course of a loan amortization you will spend hundreds, thousands, and maybe even hundreds of thousands in interest. By making a small additional monthly payment toward principal, you can greatly accelerate the term of the loan and, thereby, realize tremendous savings in interest payments.