After a season of record-breaking holiday spending, Americans are heading into 2019 with debt still at an all-time high — $1 trillion in credit cards, according to the Federal Reserve. Plus another $1.1 trillion in auto loans, according to credit agency Experian. And would you believe we’re still adding to it? Consumer debt — which also includes student loans and personal loans — continues to rise even as interest rates tick up, according to the latest data from the Fed.
But get this: MarketWatch says that people are largely staying on top of what they owe. That’s good news, because it’s important to consider paying off debt rather than letting it accrue. Here are a few things to consider about paying down debt as you plan and budget for the new year.
Unpaid Debts Generally Cost More in Interest
Some observers view borrowers’ willingness to make big-ticket purchases as a sign of confidence in the economy. However, as the The Wall Street Journal noted in early 2018, the “shift to non-mortgage debt” like credit cards and personal loans, which typically carry higher interest rates, has been concerning to some economists. Personal finance experts have long stressed the potential benefits of paying off credit card balances every month — and if you can’t do that, addressing your debt head-on as quickly as possible is still ideal.
Paying Off Debt Can Have A Positive Impact On Your Financial Goals
Missing credit card payments is generally considered to be worse than paying the minimum amount due and carrying a balance, thanks to late fees (which can add up fast) and the potential ding to your credit score (which will impact your ability to secure favorable loans for bigger financial goals, like owning a home or a new car). To avoid accidentally missing a payment, most card companies offer the option to set up auto pay — and most financial experts think it’s a great safety net. If you feel like you might miss a payment, communicate proactively with your lender. Otherwise, the penalties could start to pile up.
What About Mortgage Debt?
The government’s Consumer Financial Protection Bureau stresses the importance of staying current with your mortgage, too. If you feel you are struggling, the CFPB offers resources to help, and also encourages people to be proactive by calling their loan servicer at the first sign of struggle so that they can explain the issue and see what options are available depending on the situation.
When Does Paying Off Debt Through Consolidation Make Sense?
The average U.S. household has $8,284 in high-interest credit card debt, according to WalletHub’s 2018 survey. But only you and your family can decide whether debt consolidation — rolling multiple debts into one — is the right choice when it comes to addressing what you owe. A cash out loan option could use your home’s equity to consolidate your high interest debt into one monthly payment and may reduce what you owe each month. This type of loan has lowered Mr. Cooper customers’ monthly debt payments an average of $521 a month*.
*Average monthly debt payment reduction figures based on Mr. Cooper refinances from June 2017 – May 2018 in which a customer paid off at least one non‐mortgage debt. Comparison between total minimum monthly payments before and after refinance. Individual results will vary.
A debt consolidation refinance increases your mortgage debt, reduces equity, and extends the term on shorter‐term debt and secures such debts with your home. The relative benefits you receive from debt consolidation will vary depending on your individual circumstances. You should consider that a debt consolidation loan may increase the total number of monthly payments and the total amount paid over the term of the loan. To enjoy the benefits of a debt consolidation loan, you should not carry new credit card or high interest rate debt.