1. Debt Costs You Money
I know that sounds a little weird because debt is money, but here’s what I mean. As I’m sure you know, each month, we’re charged an interest fee on the balance we didn’t pay in full the previous month, so when we continually carry a balance on our credit cards we consistently pay that fee.
This isn’t mind-blowing news of course because most of us know this already, but when we have debt it’s easy to conveniently “forget” this or not think about it because it’s too scary or depressing to think about how much we are paying to maintain our debt.
2. The sale price is what debt-free people pay. You pay more.
This point really expands on the first point, but I think it’s one of the most important reasons to pay off your debt, so I really want to dig into this. Here’s an example:
Let’s say I buy a dress for $100. I pay for it with a credit card that doesn’t have a balance, and I pay that credit card in full when I get the bill next month. Sounds like I’m being responsible, right? Yes, but even though I paid that bill in full, I have several other credit cards that carry a balance from month to month. So how much did I pay for that $100 dress?
Look at it this way:
If I had taken that $100 and put it towards reducing the balance on one of my other credit cards, then I would pay less interest on that card going forward. I suck at math, so I can’t figure out exactly how much that adds to the cost of the dress (and it also depends on the interest rate of your credit card). However, I know that the cost of that dress goes up every month by the amount of interest I would have saved if I had paid my debt instead of buying the dress.
Obviously we still need to buy things like clothes, food, etc., but this example is meant to get you thinking about what you’re spending your money on. Is it worth it? Would this money be better spent on reducing your debt?
3. Raise Your Credit Score
Credit scores can be complicated, but once you figure out some of the most basic rules that the credit bureaus use to determine your score, then you can figure out the steps you need to take to raise your score over time. In relation to debt, a couple things that affect your score are:
- Total amount of debt you carry
- The amount of debt you have to the amount of credit you have available.
If you have a credit card with a credit limit of $10,000 and your balance on that card is $9,000, then that will have a negative impact on your credit score, because the card is almost “maxed out” which indicates to the credit bureau that you are not financially responsible. You are a credit risk in their eyes.
However, if you had that $9,000 total debt spread out over 4 cards that all have a credit limit of $10,000 then your score would not be affected as badly because none of the card balances are near the credit limit.
Now, this doesn’t mean the solution is to apply for more cards and transfer balances just to spread out your debt. Transferring balances usually comes with fees attached, and our goal is to eliminate our debt so that we don’t keep paying these fees and interest charges. Transferring balances can be part of a strategic plan to pay off your debt over time, but that’s a longer discussion and more specific to your particular situation.
By paying down, and eventually paying off your debt, your credit score will go up over time as you reduce the debt to credit ratio.
4. Reduce Stress
You probably noticed already that debt causes stress and anxiety. For me, just thinking about all the money I owed and all the interest I was being charged each month would cause my chest to tighten up. Not to mention the monthly stress of getting all those bills and having to figure out if my paycheck would cover everything. Ironically, all that stress just made me want to go shopping! Thus continuing the downward spiral into more debt and more stress.
Lately, I’ve been realizing that debt is a prison. It takes away our freedom and our ability to make certain choices in life. Have you ever thought about changing careers or going back to school? Have you ever thought of quitting your job and traveling the world? How about starting over in a new city with a new job? Have you ever thought about something like that, only to have fear kick in as you remember all the bills you have to pay each month? I know I have.
If we don’t have debt, we have flexibility and freedom. Right now, I’m about 11 months away from my release from prison. Are you ready today, to make the commitment to pay off your debt and join me outside the prison walls?