Paying off debt or getting out of debt completely not only feels great, it saves you a substantial amount of money in more ways than you might suspect. Consider the following financial benefits of climbing out of debt.
1. Saves on interest fees
Many people who borrow on credit cards tend to underestimate how the interest adds up over time. Laws that now mandate credit card companies to disclose how much interest you will pay if you only make the minimum payment on a revolving account are eye-opening and sometimes shocking. The amount of money you’ll pay in compound interest if you just make minimum payments on a credit card balance could actually surpass the original bill.
2. Earns you interest
When you climb out of debt, you’re able to start or add to an emergency savings fund and contribute to savings vehicles such as CDs, savings bonds and retirement accounts. Funneling the money that would otherwise be spent on debt into such interest-bearing accounts can earn you a substantial amount of compound interest savings.
3. Saves you the cost of sinking deeper into debt
If you’re in debt, you’re less likely to have an emergency savings fund, which means when trouble strikes you might be forced to reach for credit cards to cover the costs or find yourself dipping into long-term savings accounts like retirement funds. When you climb out of debt and build up savings, you’re far less likely to fall back into debt if an emergency arises that requires money.
4. Better credit scores equal better savings
When you pay off debt, your credit score will rise, because your debt to income (DTI) ratio will improve. The higher your credit score, the better rates you’ll get on car insurance. You’ll also avoid having to shell out money for deposits on items like utilities and cell phones.
Potential landlords also check credit scores before renting. If you have a good credit score, they may be willing to lower the rent and save you money, because your credit indicates that you’ll be a good renter.
5. Lucrative job opportunities
Employers also check credit, because good money management skills indicate that a person will be a responsible employee. So being debt-free and having good credit may mean that you land your dream job and earn the salary you desire, which puts more money in your pocket.
Are you trying to become debt free? What’s one way you’ve saved money by paying down debt?
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