Over the last year, in response to the Coronavirus and its economic impact on the country, the U.S. government has provided numerous rounds of benefits in the form of stimulus checks. For many, this has been a lifeline for being able to continue buying basic necessities. For others, these payments were simply put into savings, as they may not have been as impacted financially. There’s another great use for these payments, however: paying down lingering debt.
Before taking this step, however, give yourself a litmus test and ask yourself a few questions about your finances:
- Can continue to afford groceries as well as other basic necessities? This should be priority number one.
- Are you able to cover your rent or mortgage? This is likely to be your largest expense, so if you can still afford to pay it, you’re in a good position.
- Can you afford to pay your high-priority bills on time? Utilities, in addition to auto loans, are high-priority bills. Falling behind on these expenses can have significant consequences.
- Do you have an adequately funded emergency savings fund? You should have three to six months’ worth of expenses in a highly liquid savings account.
If you can answer “yes” to these questions, then you’re in a good position to use your stimulus check to pay off your outstanding debt. But you'll want to go about it strategically.
The Benefits of Paying Off Debt
Paying down debt saves you money in the form of interest payments on revolving debt. It also helps increase your credit score because you’re credit utilization will be lower. You’ll free up more discretionary income too, which you could use to invest and build wealth.
If you meet the criteria and want to knock out some of your debt using stimulus money, the following is an example of how to do so:
- First, pay off credit cards. Credit cards are the worst kind of debt you can carry. Too much revolving credit card debt can damage your credit score, and credit cards are typically expensive due to the high interest rates.
- Next, pay off personal loans. Unless you qualified for a personal loan with outstanding credit, chances are the interest rate is just as high – or higher than credit cards. So your next best bet for utilizing your stimulus cash is eliminating personal loans.
- Pay down remaining debts. If you have a home equity loan or HELOC, paying it down is a good idea, because falling behind on this type of debt can put you at risk of losing your home. If you have an auto loan, then paying down a chunk of that will help you become debt-free sooner and save some money on interest as well.
It’s not often that free money shows up in our lives like the stimulus checks. If you’re carrying outstanding debt, but are otherwise in a good financial place, then stimulus money presents a great opportunity to cut your debt down substantially and begin focusing on building your wealth.