Free Yourself of Debt by Taking Steps to Pay It Off

By William E. Best, PNC Senior Vice President, Community Development Banking

Paying off debt is among the best ways to relieve the burden and stress of financial worries. It also provides a way to increase your credit score, which in turn further enhances your financial stability.

But eliminating or reducing debt requires sacrifice. By developing a solid plan and following through with it, you can prevent your situation from going from manageable to out of control. A good start in this process is to consider utilizing the following self-help measures:

Develop a budget

The foundation to becoming debt-free is to follow a budget.

• Determine a detailed list of expenses and after-tax income

• Create a chart that:

– categorizes all of your income and expense categories, including debt payments

– tracks the dates you are paid and the dates you make payments

• Set targets for how much you plan to spend in each category on a weekly or monthly basis over the next few months.

Track your findings by creating a second chart, where you record your actual daily spending. Finally, put the charts side-by-side and look at how your actual spending compares to the targets you set. If you are not meeting your goals, adjust your targets and look for ways to increase your income and/or reduce expenses. Either way, keep an entry for debt payment and maintain it. Over time you’ll be able to make a substantial reduction in what you owe.

Take charge of your credit cards

The best way to reduce debt is to reduce credit card usage and pay more than the minimum balance. It’s imperative to your financial stability to stop using credit cards for purchases you can’t afford. Pay your credit cards off in order of the highest interest rate first, and the remaining in descending order.

Many credit card companies charge 20 percent or more in interest. You should contact your credit card company and request a lower rate. Also consider transferring the balance of your credit cards to a low-interest card or a home equity installment loan. However, be careful not to buy anything with a new card because the low-rate typically only applies to the transferred amount, not new purchases.

Pay off debt or cushion your savings?

People who manage their money often wonder if they should take available cash to invest in savings or reduce their debt. Financial experts recommend that everyone have a plan to build savings. Becoming debt-free, however, is an excellent strategy for creating long-term financial health.

Generally, high interest debt that should be paid off before contributing to savings is considered “bad debt.” This is debt that does not represent an investment in your future, such as purchases made by credit cards. The high interest rates attached to them could end up hurting your finances if the rate on savings is lower than that on your unpaid debt. Consider this example:

Monthly amount you can save or use to pay down debt: $300

Amount of credit debt you owe: $5,000

Interest rate on debt: 20%

Term of debt: 240 months (estimated term for credit cards)

Required monthly payment: $85

Paying $300 a month for 1 year saves $250 in interest and pays the credit off in 20 months.

Rate you earn on savings: 4%

Federal and state tax rate: 30%

Saving $300 per month for one year earns approximately $67 in interest, $47 after-tax.

If you pay off your debt, you’ll avoid paying interest of $996 over 12 months. If you invest instead, you’ll earn approximately $47 after paying taxes. It actually costs you $949 to invest your money rather than pay off debt.

In contrast, once your “bad debt” is paid, you should begin bolstering your savings even though you have outstanding “good debt,” such as student loans and a mortgage. The interest rates attached to most of these loans are comparatively low, so there is little reason to pay down this debt quickly, though you want to continue making your monthly payments.

You may find the process of debt reduction difficult at times because you have to follow a budget and limit your purchases. But you will eventually reap the rewards when you feel less worry and anxiety and see your net worth increase.

To learn more about PNC Bank’s products and services, stop by a local branch, call 1-888-PNC-BANK or visit

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