Success Depends on Debt

Or, rather, success depends on how we handle our debt, especially in our prime earning years. Paul Petillo at Target2025 has a few, simple guidelines on how to best service your debt.

Paying your mortgage should come as no real surprise as the single most important obligation to pay. The easiest way to think about this comes from the relatively inexpensive service cost (interest rate) you pay on that mortgage.

You may be paying as much 15% less for this debt and if inflation is factored into the equation, the length of the loan actually works in your favor. (If inflation goes up and your dollar is worth less, your payment doesn’t change, giving you the illusion that over time, the mortgage will actually be less costly.)

We’re very fortunate because interest rates (at least here in the United States) are very low. In fact, I read today that both the 30 and 15 year mortgage rates are at all time lows…again…for the sixth straight week. Buying a house now (with a fixed rate) is wise because you’re borrowing money at an extremely low cost. When rates rise, as they will, you’ll be able to service your debt easily. But only as long as you don’t borrow too much.

What do you do if you can’t refinance or you’re underwater on your mortgage?

If the value of your home is lower than the mortgage or close to its new appraised value (termed underwater and only a problem if you are planning to sell in the near future), keep paying the loan and look for mortgage relief, refinancing or simply wait until the equity returns.

And, of course, credit cards.

If you have credit card debt, you should never lose sight of the FICO score attached to your activities. Simply shutting down these lines of credit could have an impact on that score and decrease your ability to refinance in the future, purchase insurance and possibly even switch jobs. FICO actually wants to see consistent use of cards; not a list of accounts closed.

How we deal with debt, especially when we’re younger, can have a major impact on our future quality of life. Setting up a smart debt payment plan can only increase the likelihood of our personal financial success.

Read the full article at Target2025.

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