Americans began 2020 with an accumulated credit card debt of $3 trillion, so don’t feel alone when you find yourself with high-interest debt to pay off.

But, the stock market is also raging at all-time highs. Do you pay off your debts or invest?

Both have their advantages and their limitations. If your debt is high, the conservatives will always tell you to tackle your debt first. But is it necessarily the best option? The answer is complex, and it hinges on each individual’s financial situation. When considering whether to pay off your debts or invest you should consider these questions first:

What Is Your Financial Baseline?

A straightforward way to assess your financial baseline is to create a budget to see how your monthly income is divided. Experts recommend the 50/30/20 approach:

• 50% for necessities
• 30% for optional expenses such as recreation and entertainment
• 20% for savings and debt repayments

Make sure you have first built up an emergency fund and resolve any past-due debts that affect your credit rating. Then, you are ready to calculate the amount of money you may set aside to pay off your debts or invest.

Look at Your Debt APR Compared to Your Projected Investment Interest Rates

Look to your considered investment interest rates to the APR (Annual Percentage Rate) debt interest rates. If you expect a yield on your investment that is lower than your interest rates, it is advisable to pay off your debt first. Credit debt interest averages far higher than lower-risk investments, and so it makes sense to pay it off first.

If the annual percentage rate of your debt repayments is at a lower interest rate than your projected returns on your investment, then it makes sense to invest.

Payday and title loans have high-interest rates and these should always take priority over investing. Be careful of comparing just interest rates and not APR rates because the APR reflects the full cost of the loan, including fees and sundry charges.

Why Investing Is a Good Move?

1. Your money will grow — Most investment securities offer returns on your initial investment over time and, unlike savings which are useful for future needs but provide no actual income and no increase in your original amount.

• Build a retirement — You may invest in a variety of ways such as stocks, bonds, mutual funds, real estate, or precious metals to ensure that you may have a nest egg for your planned retirement.

• Earn higher returns — Investment vehicles offer a higher return than a savings account.

What Are the Key Investment Types?

Certificates of Deposit (or CDs) and US Treasury Debt

Experts consider CDs and US Treasuries the safest forms of investing. They are referred to as fixed-income investments and deliver slow and steady returns at a slightly higher rate than your average savings account. The FDIC, NCUA, and the American government protect these investments.

Stocks

With these forms of investments, as the risk increases so do your returns increase correspondingly. One can invest in blue-chip companies like Apple (AAPL) or Microsoft (MSFT) or even Bank of America Corp. (BAC.)

These reputable firms pay investors in the form of dividends, which are payments made by a company to its investors and are usually a means of profit distribution.

Alternatively, one may invest in new companies, and instead of dividends accrue wealth through the appreciation in the value of shares.

Corporate Debt

Companies may issue debt to investors to fund new investments or operations in the form of corporate bonds. These types of bonds carry a higher risk than treasury and municipal bonds, so the interest on these bonds is higher.

The company will provide investors with periodic interest and return the principal amount to the investor when the bond matures. Rating agencies usually will provide these corporate bonds with a rating with AAA being the most secure and anything below BBB holds a greater risk

Municipal Debt

Local governments and agencies may issue debt to fund municipal operations and specific projects in the form of bonds. These municipal bonds carry less risk than corporate bonds and have the bonus of tax advantages, but these advantages are most beneficial to high-earning investors and the long-term returns are relatively low.

Mutual Funds

Mutual funds collect money from a group of investors and use it to buy securities such as stocks or bonds. Investors may buy a share of this fund, operated by a mutual fund company. One can purchase these shares from the fund company or a broker only.

Exchange-Traded Funds

ETFs are like mutual funds in that they pool money from investors and invest it in securities. Investors can’t purchase ETFs from the holding company, but one may trade them on market exchanges.

What Is Risk Tolerance?

Risk tolerance reflects the investors’ ability to take risks when investing and they should take many key factors into account such as

• Age

• Income

• Period of investment

• Individual tax situation

Younger investors have more options to take high-risk options when investing with high disposable income. Older investors with pressing concerns of retirement and health care costs may opt for low-risk investments with higher security.

It is always an option to use your greater capital in fixed-term investments. The longer you are away from retirement, the more you may gain from fixed-term investments rather than repaying your debt.

Younger investors also have greater opportunities to take higher risk investments because they have a greater capacity to recover from failed investments through income generation.

Interest on Debts

Some debts are not necessarily bad, such as mortgages and tax-deductible student loans. Simple interest concerns only the debt itself, whereas compound interest is more complicated. Compound interest concerns both the original debt and the interest accumulated during the length of the loan.

Paying Off Debt vs. Investing

When deciding whether to pay off your debt one should compare:

• The after-tax interest rate that you are paying on your debt

• The after-tax return you expect on your investment

If your investment returns are higher than the interest on your debt, then you should consider investing over debt repayments.

Can You Pay Off Your Debt and Invest?

When a person focuses all their money and attention on paying back high credit debt, it may be a slippery slope. Without a buffer of (they say 6 months or $1,000 at least), you will have no recourse but to run up more credit should any emergency arise.

That being said, you may opt to find a balance between savings, debt repayment, and investing which could make the process longer but provide you with long-term payoffs. This sadly is not a viable option for those of us with high-interest credit debt. Providing that your debt is low interest such as a mortgage may help you decide that investing is an option open to exploration.

Conclusion

High-interest debt can not only be a financial drain but an emotional burden. Once you have paid off your high-interest debts, you will have more money available to pursue your investments. This might necessitate cutting down on your discretionary 30% monthly spending, but it will improve your quality of life in the long term.

Always strive to have savings to buffer you from unforeseen circumstances that life throws and find yourself in situations where you may accrue credit card debt. Assess your financial baseline before jumping into any investments and make sure you have a solid financial footing before taking the plunge.

When deciding if you should pay off your debts or invest, remember that there is no guarantee on any investments. Many investments only yield their returns over longer lengths of time, with periods in between of negative growth. When considering investing it is always a smart idea to meet with the experts. Financial advisors can help guide you to the best investments suited to your individual financial needs.

Don’t feel alone if you have found yourself with a credit score of 480. COVID-19 has severely impacted the economy, with many people attempting to regain their financial footing after a significant loss of earnings.

Your credit score affects almost every aspect of your financial life. From cell phone bills to internet rates, your credit history comes into play. Seeking a new apartment to rent? Same thing. Bad credit can seriously infiltrate a person’s day-to-day life.

How Are Credit Scores Calculated?

Credit scores are based on the FICO score model created by the Fair Isaac Corporation, but there are other models such as VantageScores developed by Equifax, Experian, and TransUnion in 2006 that are alternatives to standard FICO system.

Credit scores range from 300 to 850 and reflect your creditworthiness. They base these scores on your:

• Credit history
• Number of open accounts
• Total levels of debt
• Repayment history.
• Credit mix

What Does a 480 Credit Score Mean?

Unfortunately, if you have a 480 credit score, the news is not good. A 480 credit score is considered very poor on the FICO model, and individuals with this score should seek ways to improve their credit score to avoid the financial implications.

Don’t feel alone, however. The 2020 figures show that over 16 percent of the American population is in the red credit score-wise. The good news is that you can fix your 480 credit score by following these steps or read a different take from CreditGlory.

How To Improve Your 480 Score

A strange as it sounds, fixing your 480 credit score begins with you requesting your credit score. Each individual is entitled to one free copy of their credit report annually from the three nationwide credit bureaus (you may receive this report by visiting www.annualcreditreport.com.)

In your detailed credit report, you may isolate the incidents that caused your credit score to decline and clarify the issues you need to address to improve your credit score.

What Negatively Impacts Your Credit Score?

Public Information

Public records such as bankruptcy may have a severe impact on your credit score. A Chapter 7 bankruptcy may remain on your credit history for up to a decade and Chapter 13 remains under your name for seven years.

Although you may improve your credit score over the years, the public notice may still affect your success with certain lenders.

Credit Utilization Ratio

Put simply, your credit utilization ratio is how much you owe, divided by your credit limit. Your utilization ratio reflects how much you owe on all your revolving accounts compared to your total available credit. This sum is expressed in a percentage form. Again, you need to:

• Add up all your existing credit card balances,
• Add up all your existing credit limits,
• Divide the total debt balance by the total credit limit, and
• Multiply by 100 and you will find your percentage ratio.

Your ratio should never be over 30% or it may seriously affect your credit score, and both FICO and VantageScore rely on this ratio heavily when calculating consumer credit scores. If you find that your credit utilization ratio is too high, consider paying off your highest card debt to reduce your ratio.

Late or Missed Payments

Very self-explanatory. FICO will keep track of all your late payments. This aspect of your credit history is very important because it makes up over one-third of your FICO score.

Length of Credit History

The length of your credit history can make up over 15% of your credit score. For example, creditors will want to see a credit history that extends past 10 years or even longer.

Total Debt and Credit Mix

When calculating credit scores FICO favors users with several credit accounts and a revolving credit mix.

So, if you have only one type of credit account such as credit cards, think of adding some installment credit loans such as a mortgage or a car loan. This accounts for 10% of your potential FICO score.

Recent Credit Activity

Try to avoid applying for loans or credit cards often or in a brief space of time. These credit checks or “hard inquiries” made by institutions are recorded on your credit report and they may affect your credit score. Your recent credit activities may impact your credit score by 10%.

How Can I Fix My 480 Credit Score?

There are some issues in credit scores that can only be mended over time, such as bankruptcy. However, there are ways to improve your credit score from 480.

A Debt Management Plan

If you find yourself in over your head with credit debt and cannot make the payments, it is best to consider debt counseling. The debt counselor will work with you to arrange a comfortable repayment plan and close your accounts.

It seems counter-intuitive to do this because your credit score will drop considerably, but it may be worth it in the long run. Debt management is much easier to rebound from than bankruptcy.

Otherwise, if you are not at the point where you will take such a drastic step, perhaps meeting with a debt counselor will help you find the best way to pay off your debts and improve your 480 credit score?

Credit-Builder Loans

You have the option of taking out a small loan from a credit union and pay it diligently to improve your credit score. If you are like me and are tempted by the cash in hand, you can choose the option of allowing the credit union to deposit your full loan amount into an interest-bearing savings account.

Once you have paid off the loan, you then have your original amount with interest (https://www.parents.com/parenting/money/family-finances/improve-your-credit-score-fast/).

The credit union reports your payment history to the national credit bureaus and your credit score will improve. Just make sure that your chosen lender sends reports all of your payments to the national credit bureaus.

Make Your Monthly Payments Ahead of the Due Date

It sounds obvious but this is the tried and true way. Pay your debts promptly and be patient.

Conclusion

A 480 credit score is as good a place as any to start to be more financially responsible and to fix your credit score. Just improving your poor rating to a fair rating of 580 to 669 will improve your financial standing considerably.

Not only will you have more credit options, but lenders will offer you lower interest rates and lower fees and rates. You present less of a risk to potential lenders once your credit rating improves and their interest rates will adjust accordingly.

If you find yourself in over your head with debts, seek advice from a professional debt counselor as many strategies will reduce your stress and improve your credit score.

Learn from your mistakes and use your credit report to isolate the bad choices that led you to your 480 credit score. It is never too late to teach yourself new habits and start along the road to your perfect credit score!