Stimulus Checks Are Helping People Get Out of Debt. Here's How
Drowning in debt? Your latest stimulus payment could be the solution.
Many Americans have seen their income take a hit during the pandemic. But despite that, consumers have managed to shed credit card debt and other loan balances.
Between March 2016 and March 2020, Americans' collective credit card and loan balances grew by 29%. But now, those balances are sitting at 13% below that pre-pandemic high, according to data from the Federal Reserve Bank of St. Louis. And a big reason for that could boil down to stimulus checks.
A get-out-of-debt lifeline
The latest coronavirus relief bill includes a round of direct payments worth up to $1,400 apiece. That money could go a long way toward helping Americans pay off debt.
So should you spend your stimulus to get out of debt? It depends.
If you need your stimulus money to pay incoming bills or cover short-term essentials, like groceries, you should focus on your immediate needs and then worry about debt. Similarly, if you have absolutely no money saved, your first move should be to put your leftover stimulus cash into a savings account. The reason? If you don't have savings, your next unplanned expense could dig you further into debt. You may not have the option to borrow again, or borrow as affordably as you did in the past. So having money in the bank should usually take priority over paying off an existing loan or credit card balance.
That said, if you have some savings and your near-term needs are covered by your paychecks, then you have a real opportunity to use your stimulus to shed some debt. But you'll want to go about it strategically. Here are some ideas of how to do just that.
1. Figure out what your costliest debt looks like
If you have several credit card balances, figure out which one charges the most interest and pay that one first. Then, plan to work your way down from there so you're tackling the higher interest rate balances before the lower interest rate balances -- unless, of course, you're able to consolidate that debt.
2. See if you can consolidate your debt
Rather than juggle numerous credit card balances, it may be easier and more cost-effective to lump everything together. If you qualify for a balance transfer, for example, you can move your various credit card balances onto a single card with a lower interest rate. That'll make all of your debt less expensive to pay off. You can also consolidate your debt by taking out a personal loan and using it to pay off your balances. That way, you'll just have one payment to keep track of.
3. Decide whether to pay off healthier debt
You may not owe any money on a credit card or personal loan. Rather, perhaps your only debt comes in the form of an auto loan or mortgage. While you could pay those debts off ahead of schedule with your stimulus money, it might not be the best choice for those funds. Both of these loan types are considered healthy debt that won't harm your credit score unless you miss payments. Also, both auto loans and mortgages (especially mortgages) are designed to be paid off over many years. So even if you have some savings, you may want to hold on to these debts and stash your stimulus in the bank -- in case you need more for an emergency fund than you initially expected.
It's not every day that an extra $1,400 comes your way. If you've gotten a stimulus check but are carrying debt, you have a real opportunity to get rid of -- or at least make a sizable dent in -- the amount you owe. And while you may be tempted to spend your stimulus elsewhere, this is one opportunity you should really take advantage of.
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