Debt
Good debt vs. bad debt
Debt is something many of us face, with the average American having $90,460 in debt.* This includes all types of debt, but it’s important to consider the difference between good debt and bad debt:
Good debt typically has a low interest or annual percentage rate (APR), which Fidelity says is normally under 6%. Generally, good debt also can help create future value, such as a home mortgage.
Bad debt is used to finance purchases that won’t create future value and usually has a high interest rate, meaning you’ll end up paying a premium for purchases that are worth less over time. Credit card debt, payday loans, and some personal loans fall into this category.
Paying off debt
A good first step is making a list of all of your current debt, along with how much you owe, the minimum monthly payments, and the interest rate. Once you know what you owe, you can choose a strategy for paying down your debt.
Just as it took time to build your debt, it will take time to pay it off, but there are a few options to help you get there.
Filling out this debt worksheet can help you get started!
In under 10 minutes, get an overview of how to take control of your debt today.
Snowball and avalanche methods
When paying down debt, there are two basic strategies for deciding how to apply extra payments. The avalanche method starts with the highest interest rate, while the snowball method starts with the lowest balance. Choosing which method is best for you is a personal decision. The avalanche method can save more on interest, but the snowball method can lead to quick wins and help you stay motivated.
Prioritizing debt against other financial goals
It’s easy to get overwhelmed if you are trying to prioritize several money goals at one time. If you find yourself in this situation, use this guideline:
- Pay the minimum on all debts
- Put away some money for emergency savings
- Save for retirement, including saving enough to receive your full employer match
- Iron Mountain matches 67 cents for each dollar you contribute, up to 6% of your eligible earnings each paycheck. If you contribute 6%, you’ll see 4% in employer matching contributions added to your retirement savings.
- Don't leave money on the table. Review or update your 401(k) contributions.
- Put any extra money toward debt (using the avalanche or snowball method)
Good credit habits
Throughout your debt payoff journey, ensure you are creating habits that can help elevate your credit score over time.
Use credit cards to your advantage
Whether it’s the offer of a store discount at check-out, the enticement of airline miles, or a pre-approved application mailed to you, the opportunity and promotion of credit cards is ever-present. When used wisely, credit cards can work to your advantage, but it’s easy to slip into debt if you’re not careful.
If used responsibly, credit cards can have advantages, such as:
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Earning cash back or rewards, for example, airline miles or hotel points
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Discounts on things you would normally purchase
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Maintaining or improving your credit score
Building your credit
Building credit and obtaining a high credit score can take time and steady work to maintain it once you get there. Credit scores are important when applying for a loan for things like a car or a home.
Watch this short video and review the tips below for improving and maintaining your credit score.
- Never miss a debt payment. Enroll in autopay or set calendar reminders.
- Be mindful of credit use. Keep your balances low to ensure you don’t go over 30% of your credit limit.
- Think before closing out cards. An old card can be factored into your length of credit or credit mix, which can impact your score.
- Be cautious about new loan applications. Applying for a new loan means the issuer or lender may make a “hard inquiry” into your credit, which could impact your score for up to one year.
- Check your credit report regularly. Ensure your account details are correct, there are no past-due accounts, and no evidence of fraud or identity theft. Check your credit reports regularly to monitor for errors and possible fraud. You can receive a free copy from TransUnion, Experian, and Equifax each year at AnnualCreditReport.com.
The true cost of credit
Think carefully if you are considering a purchase you may not be able to pay for (in full!) when your credit card bill is due. Consider this hypothetical scenario:
A new smartphone is released. The one you have works fine, but you really want the latest version. You don’t have the cash to pay for it, so you charge the $1,000 phone to your credit card, which has an average annual percentage (APR) of 14.00%. You can only afford the minimum payment, so you pay $25 each month until the balance is paid. You may have a brand-new phone, but at what cost?
- It will take approximately four and a half years to fully pay for the phone.
- By only making the minimum payment, with interest you will end up paying $1,354 for the $1,000 phone.
- If you invested the money you were using for the monthly payment instead, you could have $7,718 in five years.*
*This example assumes a $23/month investment for five years in a tax-deferred account at a hypothetical 7% rate of return. This hypothetical example assumes no loans or withdrawals are taken. Your own account may earn more or less than this example, and you will owe taxes upon withdrawal. The estimates do not reflect any reductions for taxes. In general, performance returns for actual investments will be reduced by taxes, fees or expenses not reflected in these hypothetical illustrations. Investing in this manner does not ensure a profit or guarantee against loss in declining markets.
Credit card debt
Credit card debt is one of the most common types of debt for Americans.
If you have credit card debt, the first step is making a list of the current balance and interest rate (or APR) for each card. From there, choose between the Avalanche and Snowball methods (see “Paying off Debt” to learn more) for paying down your balances. If you find yourself overwhelmed, contact the credit card companies to see what options may be available to you.
Student debt
Looking at your student loan balance can be overwhelming. Understanding your loan is the first step, then you can create a plan for how to proceed. To get started, use Fidelity’s Student Loan Calculator to track where you are and set goals for the future.
Learn how to take control of your student loans, simplify your payments, potentially reduce your payments, and ultimately pay off your loans.
To help you get a handle on your loans, remember:
- You may have a new federal and/or private student loan for each semester of school.
- Each loan may have a different interest rate.
- The type of loan you have can affect the way interest is applied.
- You can call your loan provider and ask them to explain your loan to you.
And no matter where you are in the student loan repayment process, the U.S. Department of Education offers resources to help you navigate your options.
Financial Wellness Check-up
Start your journey with the Financial Wellness Check-up to evaluate your current financial health and what you need to stay on the right path. As you work through your financial journey, be sure to check back to track your progress.
Learn about financial wellness and how regularly checking in on your finances can help you stay on the right track with your money goals.
Budget
Making a plan for your money and your spending empowers you to know where your money is going. Budgeting can seem like an overwhelming task, but it can be as simple as making a list of money in vs. money out.
Saving
No matter what you’re saving for, being a strong saver can make a big difference down the road.
Protect Your Money
Good financial habits can be easily thrown off course by unexpected life events. Be sure you have protection in place for your money against loss.
Moments that matter
From your family, to your home, to your health and retirement, get help with the decisions you face when life happens. Go now >
Iron Mountain offers a variety of benefits and resources to support your wellbeing and that of your family. Explore now >
Contact Fidelity
Fidelity representatives are available to answer your financial wellness questions, big or small. Call 800-835-5095, Monday through Friday, from 8:30 a.m. to midnight ET or visit Fidelity NetBenefits®.
Resources for Living
We all face challenges. Whatever the situation, you can turn to Resources for Living to help you thrive in life.