Getting Rid of Debt

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The only possible problem with the preceding tip would be failing to pay off the credit card immediately upon receipt of the $5,000. With interest rates on credit cards currently hovering around 20 percent, any profits made from the investment of that $5,000 would quickly disappear if you had to pay interest on a credit card debt. In much the same way, carrying any type of debt can wipe out profits made by investments.

For example, it would make little sense to invest a windfall of cash into a stock with a 12-percent return if you were simultaneously carrying the same amount of credit card debt at a 20-percent interest rate. The profits being generated by your investment would disappear when paying the interest charges on your credit card. In this case, it would probably be a better idea to use that money to pay off the credit card first.

CAUTION

Make sure that the profits you are making from your investments are not being used to pay higher interest rates on debt you are currently carrying. Determine where your money is best applied.

This rule about paying off debt before you start to invest is not absolute, however. Many debts , such as a mortgage or a student loan, for example, could not be realistically paid off in a relatively short amount of time. And postponing your investing until this type of debt is paid off would be a bad idea. What is important, then, is to consider where the money could best be put to use. If you have only $100 to invest and you are carrying a mortgage or a student loan of $30,000, applying the $100 to such a large amount would make no noticeable impact. If you used the $100 to purchase a share of stock, however, the money would probably grow substantially during the time it took you to pay off the loan. In this case, it might be a better decision to invest the money rather than attempt to pay off a debt.

Each situation will prove unique and must be evaluated on its own terms. In the scenario just given, for example, the stock may not be making as much in profits as the interest charges being applied to the loan. Nonetheless, since the $100 amount would not affect the interest amount, the amount earned by the stock is at least somewhat offsetting the amount being paid out for interest. In addition, a certain amount of debt is a good thing for credit ratings and for learning money management.

Debt a good thing? Sure. Most entities that issue credit, such as mortgage companies and credit or charge cards, base a substantial amount of their decision to offer credit to you on previous creditors' reports. These reports are amassed by three companies ”TRW, Equifax, and Experian ”that provide them, upon request, to the companies that are considering offering you credit. Should you not have any debt, your credit record would be minimal, if it exists at all. Each of these companies will also furnish you one copy of your current credit report annually free upon request. Contact information for these companies is provided in Appendix B, "Resources."

What is important to remember is that your finances are not contained in individual silos but rather are fully integrated and must thus be considered as a whole. To be perfectly frank, investing in stocks requires a certain amount of maturity and the ability to effectively handle finances. Neither one of these characteristics is often found in a person who is carrying an excessive amount of debt.excessive amount of debt.

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