3 Reasons to Pay Down Debt in 2019
by Christy Bieber | Jan. 29, 2019
The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.
Image source: Getty Images
Image source: Getty Images.
There's a lot you can do in 2019 to help improve your financial situation. But, one task you should definitely put on your to-do list: paying down your debt by making extra payments.
Paying off debt early is one of the best things you can do with your money, and there are lots of reasons why you should consider making 2019 the year you get aggressive with debt repayment. In fact, here are three reasons you should prioritize paying off debt in 2019.
1. You'll save money on interest
The problem with owing money is that it's not free to borrow. You'll have to pay your credit card company or your lender for the privilege of using the funds they've lent you. And, paying the cost of borrowing can sometimes be very expensive, depending upon your interest rate.
If you're able to pay off your debt more quickly by making extra payments, you'll reduce the total amount of interest you owe because you'll be paying interest on a smaller balance and will be paying it for a shorter period of time. And, even a small extra payment can make a pretty big difference.
If you're currently paying a $125 monthly minimum payment on a credit card at 17% with a $5,000 balance, it would take you 60 months to pay what you owe and you'd end up paying $2,431 in total interest. But, if you can add an extra $50 monthly onto your payment and pay $175 instead, you'd be debt free in 37 months and would pay just $1,454 in interest. You would be debt free 23 months earlier and would save $977 in interest.
With those kind of numbers, it should be easy to see why you need to make 2019 the year when you find extra room in your budget to aggressively pay down your debt.
2. You'll improve your credit score
Making on-time payments on your debt is essential to earn a good credit score since payment history is the most important factor in determining your score. But, paying extra to pay your debt off faster could also help give your score a boost. That's because the more quickly you pay down debt, the more quickly you'll reduce your credit utilization ratio.
Your credit utilization ratio can be calculated by dividing the credit you've used by the total credit line available. If you've used $2,500 of a $5,000 credit line, you'd divide $2,500 by $5,000. You'd have a 50% utilization ratio. Anything above 30% will hurt your credit score because lenders get nervous that maxed out cards mean your spending is getting out of control. But, ideally, you'll keep your utilization ratio as low as you can because the lower this ratio is, the better your credit score will be.
When you make extra payments on your debt, you can get your credit balance paid down faster so you'll be using less of your available credit. If you make extra payments and get your $2,500 balance paid down to just a $1,000 balance by the end of 2019, your utilization ratio would be just 20% and your credit score should go up because of it.
3. You'll have more peace of mind
Owing a lot of money is nerve wracking. The more you owe, the higher the minimum payments -- so the more likely it is you'll have trouble making those payments if you face financial hardship. Plus, the more you owe, the longer it will take for you to be debt free and able to put your money towards other goals such as saving money for the future.
Concern about paying the bills -- coupled with other money worries if you aren't working towards your goals -- could end up keeping you awake at night. But, if you get serious about debt payoff in 2019, hopefully you'll be able to end the year debt free -- or at least on track to become debt free -- so you'll have one less thing to worry about.
Make debt payoff one of your 2019 goals
There are lots of different techniques for paying off debt early. The key is to decide that aggressive debt payoff is one of your goals. If you make 2019 the year you commit to pursuing freedom from debt, just making that choice alone is a key first step towards improving your financial situation. Take that step this year and you'll be glad you did.
Our credit card expert uses the card we reveal below, and it could earn you $1,148 (seriously)
As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.
But with so many cards out there, you need to choose wisely. This top-rated card offers the ability to pay 0% interest on purchases into 2022, has some of the most generous cash back rewards we’ve ever seen (up to 5%!), and somehow still sports a $0 annual fee.
That’s why our expert – who has reviewed hundreds of cards – signed up for this one personally. Click here to get free access to our expert’s top pick.
About the Author
Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
