Fort Myers Florida Weekly

Fool’s School

Pay Off That Debt

Debt can be helpful — making it possible for you to buy a home or attend college, for example — but high-interest-rate debt can be troublesome.

Credit cards, with interest rates recently averaging almost 18 percent, are primary causes of such debt, but some car loans, student loans, and other loans can also sport hefty rates. Paying off any such debt should be a priority — for several reasons.

For starters, paying off high-interest-rate debt essentially gets you a fat guaranteed return. Imagine that you owe $20,000 and are paying 20 percent annually on it. If you pay off that debt, you’ll stop paying around $4,000 in interest per year, and can keep that sum in your pocket. It’s like earning a 20 percent return on your $20,000 investment — close to double the stock market’s long-term average annual gain.

Ridding yourself of debt can also make you better able to deal with life’s unexpected developments, such as a costly car repair or an expensive health setback. If you’re on the hook for substantial interest payments, you’ll have less money available to handle unexpected expenses. In a worst-case scenario, you’ll end up deeper in debt, facing even bigger interest payments.

On a more positive note, being free of that high-interest-rate debt can allow you to capitalize on great investing opportunities when they appear. For example, if the market swoons and suddenly lots of terrific stocks are on sale, you won’t have your hands tied by debt-payment obligations, and you’ll be able to pounce.

Debt costs you more than you probably think: If you owe $20,000 with a 20 percent interest rate and you’re making minimum payments of 5 percent on it, you’ll pay close to $10,000 in interest alone, and it will take you more than 12 years to pay it all off.

Having less debt — or being debt-free — can also boost your credit score, helping you get better deals from lenders and other financial services companies. It might also help you sleep better at night, with fewer financial worries to be stressed out about.

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