Don’t want to find yourself buried under a mountain of debt? We got you. It's time to get smart about what you owe. We're talking credit card debt, student loan debt, and mortgages with Kristin O’Keeffe Merrick, a financial advisor and money expert at O’Keeffe Financial Partners. She’s got all the tips for how to understand your debt, improve your credit, and navigate good debt vs. bad debt.
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Kristin O’Keeffe Merrick - Financial advisor and money expert at O’Keeffe Financial Partners
What’s the best advice you can give me about tackling debt?
No one has the same debt makeup, so keep in mind that debt mitigation is a personal journey. First, you need to understand your debt. This entails finding out what interest rates you are paying, how often the debt compounds (hint: most credit cards and student loans compound daily), and how long you have to pay it off. Next, you should tier your debt. For example, if the APR on your credit card is 25% but your student loan rate is 8%, you should prioritize the credit card debt, because the interest will accrue faster on credit card debt and you will owe more in the long run. My suggestion is that if you have both student loan debt and credit card debt, focus on paying off the credit cards, but do NOT stop making student loan payments. You should at the least be making a minimum monthly payment.
What’s the difference between good debt and bad debt?
All debt falls into a spectrum in terms of “good vs. bad.” Good debt is generally manageable and has a modest interest rate where payoff is reasonable and achievable. One example is a mortgage, which is a debt that allows you a window of time to pay back what you borrowed plus interest while slowly accumulating equity in your property or home. Bad debt has high-interest rates (think: credit cards) that compound on a daily basis, accumulate, and can quickly get out of control.
How can I improve my credit score while in debt?
If you put a debt repayment plan in place, make your minimum monthly payments on time, and stop increasing your credit usage, your credit score will improve. However, if you continue to pay down the minimum and use your card's full “revolver” (aka your allowable credit usage), your score will not improve much.
What actionable tips can I use to pay off debt?
1. Don’t live beyond your means. This sounds simple, but it is certainly the most difficult thing about paying off debt. Stop buying things you cannot afford.
2. Get organized. Create a budget. Understand what you bring in each month vs what’s going out. Track your spending and identify where the bulk of your money is going. Figure out how much you owe in debt and what rates you are paying.
3. Create a plan. Figure out what debt has the highest interest rate and concentrate your focus on paying that as aggressively as possible. If you’re in really bad shape, consider organizations like National Debt Relief.
This interview has been edited and condensed for clarity.
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