Why should you pay off your debts?
Debts can be overwhelming and stressful and therefore, paying them off can improve one's peace of mind.
Besides a clear conscience, paying your debts can be rewarding, since it will help you gain financial freedom by raising your credit score. Consequently, a person who clears his/her debts is deemed trustworthy by financial institutions, which allow him/her to access loan facilities that can improve his/her quality of life.
Clearing debts is never an easy task especially when one owes different parties. Therefore, one must implement a strategy that can aid in reducing and eradicating debts.
These strategies can aid you in finding the right payment process that can give you a convenient, fast, and effective way of overcoming debts. The popular strategies used include debt snowball and debt avalanche.
This strategy involves prioritizing debt according to the highest interest, thus, clearing the debt with the highest debt first and then repeating the process in order of the decreasing rates.
Therefore, one makes the minimum payments on all the debts but prioritizes the debt that accrues the highest interest by paying it off with the surplus money.
For instance, let's assume you have a car loan of 500,000 at 10%, a credit card debt of 100,000 at 17%, and a personal loan o 200,000 at 7%. An individual following the debt avalanche strategy will make minimum payments on all the debts but prioritize the credit card debt by making more payments to reduce the balance.
This strategy can help to reduce payments over time but it can also derail an individual from debt-clearance gratification.
This strategy involves prioritizing the smallest debts and working towards clearing the large ones. Through the snowball strategy, you make minimum payments on all your debts but attack the smallest debt viciously.
When the smallest debt is cleared, you repeat the process until you are debt-free.
The snowball strategy is motivating since it makes the process easy. It keeps you excited about clearing debts because you are able to see instant results, hence, remaining focused and intentional in becoming debt-free.
Although it might seem logical to start with the debt that attracts the highest interest rather than the smallest debt, personal finance is influenced significantly by the mind than behavior. Therefore, the instant gratification of clearing small debts is more rewarding and motivating than the logical sense that comes from paying unending debts according to their interest rates.