The Plan for What You Owe (and Own)
1. Start a debt-busting avalanche
Your 50s are prime time to pay down nondeductible debt. That means car loans, credit cards and lingering student or personal loans.
Why now? At this stage, you’re most likely to have the resources to clear the decks. You’ll get the biggest bang for each individual buck by paying off the highest interest-rate debt in your portfolio first, while making minimum payments on the remainder. It’s called the avalanche method, and it gets you out of debt cheapest and fastest.
If you have a credit card charging you 19 percent interest and a car loan at 4.1 percent, throw every extra dollar you have at the higher rate. Once the highest interest-rate debt is retired, move on to the next highest. (To run your own debt-free calculation, try the Credit Card Avalanche Calculator at JeanChatzky.com.)
2. Lock in low rates
You can speed your debt-free quest by reducing interest rates where possible.
In June, the average rate on a 48-month new car loan was 2.57 percent, per Bankrate.com; for a used car, it was 2.7 percent. The Capital One Platinum Prestige credit card is offering zero percent interest through September 2014, while Discover’s new “it” card touts zero percent for 14 months. You’ll likely need a credit score over 720 to qualify for such rates.
Coming up short? Pay your bills on time, use no more than 10 to 30 percent of your available credit and don’t close old credit cards.
3. Make a move on your mortgage
It’s easier to sleep when the roof over your head isn’t going anywhere.
“The happiest clients are the ones who go into retirement completely debt-free, including the mortgage,” says financial planner Bill Losey, author of Retire in a Weekend.
If your interest rate is 4.5 percent or higher (as of December 2012, 45 percent of the nation’s first mortgages have interest rates above 5 percent, according to CoreLogic), consider refinancing, says Keith Gumbinger of mortgage-information website HSH.com.
Act fast, as rates have been rising (the average rate on a 30-year fixed-rate loan topped 4 percent nationally in June). For timing purposes, a 15-year loan is better than a 30, but payments will be significantly higher. You can turn a 30-year loan into a 23-year loan just by making one extra payment each year. But don’t pay off the house at the expense of retirement saving. “You may end up with no mortgage but zero cash,” Gumbinger warns. “That’s foolhardy.”
Next page: The plan for what you make and spend. »