Five Reasons to Get Out of Debt

Credit card debt and installment loans can take a large percentage of your monthly income. Some people accept debt and are content with small minimum payments each month. However, debt has some negative consequences, and if you want to improve your finances, getting out of debt can help.

Reduce Monthly Expenses

Even if you're only putting $20 or $30 each month toward credit card debt, these payments increase your monthly expenses and make it so you have less cash to care for other important matters. If you have 10 credit cards, the minimum payments can amount to $200 a month. Think of what you could do with $200 or more a month in disposable income.

Increase Credit Score

There is a strong connection between credit scores and consumer debt. Some people believe that making timely payments each month is enough to keep a high score. True, payments do make up 35 percent of credit scores. However, the amount of debt you owe makes up another 30 percent of your credit score, and owing an excessive amount of consumer debt can significantly reduce your rating. Paying off debt not only improves finances, it also increases your personal rating.

Interest Rates

When applying for new credit cards or loans, lenders look at your credit history and score, and a lower credit rating often justifies higher interest rates. This may sound like a minor inconvenience, but acquiring a high interest rate can affect your ability to afford a home or car, and you'll pay more over the life of the loan. A person with good credit and few debts may receive an interest rate of 4 percent on a car loan, whereas a person with high debts may receive a 6 percent rate on the same car loan. This rate difference can increase monthly payments by $30 or more per month.

Start Saving

With less of your money going to debt payments, you can put money aside and begin a savings account. Rather than pay $200 a month in credit card payments, put this money in the bank and save about $2,400 a year. After four years, you'll have nearly $10,000 in your savings account. Use this money to make home improvements, pay for college expenses or start planning for retirement

Work Less

Overwhelming debts force some people to work longer hours at work or seek part-time employment to keep their heads above water. Once you've paid off your debts, you can breathe again and possibly cut back your hours. Spend more time with family and enjoy personal pursuits.