Debt: 10 Questions

Jonathan Clements

GOT DEBT? TO GET a handle on the situation and figure out whether you’re handling your loans and credit cards properly, here are 10 questions to ask:

  1. What’s your net worth? You might have a home and sizable financial accounts. But what are you worth once you subtract all your debts?
  2. Are you taking the necessary steps to stop thieves from borrowing money using your identity? To protect yourself, regularly check your credit reports for errors and accounts you don’t recognize, and seriously consider freezing your credit or placing a fraud alert with the three major credit bureaus.
  3. What’s your credit score? With so many websites and financial institutions offering free scores, you don’t have to pay anything these days to find out where you stand.
  4. Do you carry a credit card balance? That ranks as one of the most foolish financial mistakes. On top of that, if your balances are large relative to your cards’ credit limits, you are likely hurting your credit score.
  5. Are you using a rewards credit card for all daily spending? You should be getting at least 1% cash back or the equivalent in other rewards, such as travel points.
  6. Are your children taking on a reasonable amount of student loans, given their likely career earnings? As a rule, college students should limit their total student debt so that the resulting payments don’t consume more than 10% of their eventual pretax income.
  7. Should you make extra principal payments on your mortgage? Even if you have a home loan with a rock-bottom interest rate and even with the tax deduction, the interest you save by paying down your mortgage is likely greater than the interest you could earn by buying bonds and certificates of deposit in your taxable account.
  8. Do you have a home equity line of credit? The fees involved are typically modest and it could come in handy if you have a financial emergency. You might also use the credit line to pay off higher-cost debt, such as credit card debt, or to finance your next car purchase.
  9. Is your job at risk? If so, look to pay back any 401(k) loans. If you fail to get the loans paid off before you leave your employer, they’ll be considered a retirement account distribution, triggering income taxes and possibly tax penalties.
  10. Are you on track to be debt-free by retirement? Servicing debt in retirement could force you to take larger annual retirement-account withdrawals and to sell winning investments in your taxable account. The resulting higher taxable income could, in turn, trigger taxes on your Social Security benefit and lead to higher premiums for Medicare Part B and D.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. This is the ninth article in a series. Click here for links to the other articles in the series.

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