If you have extra money to pay creditors, analyze where the money would be most effective. The answer lies within your personal finances. Assessing the situation will help you decide whether to pay extra on your mortgage or credit cards.
Considerations
Extra money indicates you are managing to live within your means. Financial consultants recommend a savings account with six months of living expenses, according to Bank of America. This savings account is a priority for your protection in case you lose your income source or become ill. Once you have accomplished that goal and your choice is between credit cards and mortgage payments, the usual recommendation is to pay whatever has the highest interest rate.
Effects
If you have extra money and want to pay off debt, credit cards usually have the higher interest rate and therefore you should pay the credit cards. Check the interest rate on your mortgage. Second mortgages often have a high interest rate, but a primary mortgage should be lower interest than a credit card.
Significance
A mortgage is long-term debt and credit cards are short-term debt. Once you pay off the short-term debt, you might want to tackle the long-term debt. Payment into a retirement plan is usually wiser than paying off the mortgage, according to MSN Money Central. This is particularly true if your employer matches or pays 50 percent on every dollar you put into the retirement fund. Dollar-for-dollar match is best, but 50-cents-on-the-dollar match is still worthwhile. Some employers have a 401(k) and 403(b) combination matching plan where if you add to the 403(b), they will add to the 401(k). The Social Security Administration reports that Social Security meets about half of retirement needs, so it is important to save for retirement.
Time Frame
In the credit business, time matters. The earlier in the month you pay your credit card, the less the interest costs. If you carry a balance on your credit card, there is no grace period. Interest accrues every day. Bankrate.com suggests that you pay early in the month every month to save what will be a small amount every month but a large amount over the course of the year or the life of the credit card.
Potential
The key to paying off credit card debt is to stop charging on the card, according to Bankrate.com. Once you stop adding to the balance, you have a better idea of what you are spending and the payments have some decreasing effect on the balance. Debt advisors like Steve Bucci of Bankrate.com suggest striking a balance between spending, saving and debt repayment. Develop a spending plan based on this balance to get the most out of your money.
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