just an expense. Interest rates are typically high, and it’s money better spent, or saved, elsewhere.
So if you’ve got credit card debt, getting rid of it should be a high priority. Paying off your cards is the equivalent of getting a risk-free return of 17% (or whatever your prevailing interest rates happen to be). That’s pretty spectacular, since other risk-free investments, such as Treasury bills, currently pay less than 2%.
Paying off student loans or mortgage debt early also gives you a risk-free return equivalent to the effective interest rate you’re paying. That rate is usually low enough, however, that you’re better off contributing to retirement funds, especially if you get an employer match. Of course, you could do both — once you’ve maxed out your retirement savings, you can start throwing any extra money at your lower-rate debt.
A smart goal for most people is to be debt-free by the time they’re ready to retire. Carrying debt into retirement can be dangerous, since making the payments on a fixed income can strain finances and cause you to run through your savings faster.
All this assumes that your debt load is currently manageable. It may not be if you’re spending 40% or more of your income on debt payments, including your rent or mortgage. That’s the level the Federal Reserve says is indicative of financial distress.
If debt payments are eating too much of your earnings — or if you’re missing payments, borrowing from one card to pay another or being sued over your debt — you probably need help. Consider contacting both a credit counselor (the National Foundation for Credit Counseling offers referrals) and a bankruptcy attorney to understand your options.
The important thing is to act. Allowing your situation to deteriorate because you’re too embarrassed to seek help would be a real shame.
This column was provided to The Associated Press by the personal finance website NerdWallet.
Liz Weston is a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score.” Email: firstname.lastname@example.org. Twitter: @lizweston.
NerdWallet: American Household Credit Card Debt Study http://bit.ly/nerdwallet-average-household-credit-card-debt