Debt Costs Money Don’t You Know
Debt Costs Money Don’t You Know
Debt costs money: as obvious as this statement sounds, many people don’t realize that their debt is costing them a lot of money. People do realize that their debt stresses them out and restricts their spending activities, but they don’t tend to think about the fact that they are paying to have debt. In fact, people essentially buy debt all the time.
The reason debt costs money is the interest rates.
Interest rates are the prices a person pays to have monies that he or she doesn’t actually own. A financial institution or other lender receives the amount of an interest rate as compensation for lending money. Interest rates are expressed as a percentage over the period of one year.
When you get a mortgage for a property, your mortgage has an interest rate on the money you borrow. When you sign up for a credit card, the card comes with a standard interest rate that you will pay on any item you charge to the card. When you get a line of credit, you are also agreeing to pay the interest on any money you withdraw. Essentially, you are paying for the debt.
As interest rates rise, consumers will pay more and more for services their debts, especially if they have a variable mortgage or a line of credit. And, some debt is more expensive than others. Luckily, there are some ways to help people reduce the amount of money they spend on debt each year.
1. You can make accelerated debt payments and attempt to pay your debt off more quickly. This will save you thousands of dollars in the end on interest payments. To find out how much you stand to save, try searching for an “accelerated debt payoff calculator” on the Internet. Pay off the debt with the highest interest rate first. This is the most costly debt. Usually this will be any credit cards you have.
2. Pay attention to your credit card contract and company. Legally, your credit card company must only give you 15 days written notice before increasing your interest rate. Consider transferring your credit card debt to a card with a lower interest rate. Look for cards that promise a lower rate for a specific period of time. It can be advantageous to switch cards as low-interest periods expire.
3. If you have a line of credit, consider switching it to a loan if interest rates are expected to rise. The interest rates on lines of credit are tied to prime rates, so if rates rise your interest payments will increase as well. With a loan your interest rate will be secured.
4. If interest rates are rising and you have an adjustable rate mortgage, consider refinancing into a fixed rate mortgage. This isn’t a good idea if you are planning on selling your home shortly, since you will have to pay a penalty for refinancing.
