Debt. It is just a four-letter word, but holds a significant weight when it comes to personal finances. The good thing is that you’re not “a loan,” and everyone deals with it at some point in life. Setting the debate about ‘good’ and ‘bad’ debt aside, getting into debt is considered normal. It can be an integral part of your overall money management strategy. In fact, about 55% of Americans with credit cards have debts.
Even the most formidable tycoons of our era have had their fair share of setbacks. In one way or another, the moguls managed to rise above their debts and have now created milestones and footprints of success that inspire millions.
By planning ahead, informing yourself, and following some of the tips we’ve provided below, you have the opportunity to be on the road towards attaining financial freedom. We’re here to help. After all, you’ve got nothing to lose but your debt.
- Make a List of All Your Debts – and the Details
According to a study conducted by the Federal Reserve Bank of New York, many Americans underestimate how much they owe on credit cards. The study showed that people had a better glimpse of their mortgage and car loan balances, but very little knowledge on their total debt balances for every lender.
You need to make a detailed list of your debts, including each creditor, how much you owe them, monthly installments, and when payments are due. Listing out your debts will allow you to have a clear picture and stay informed of what you ought to pay.
However, it is worth noting that making a list is not enough. You need to make deliberate choices to periodically refer to the list and plan to sort them accordingly. Also, update the list monthly as the total amount of your debts changes.
- Determine What Your Debt is Costing You
Understanding how much your debts cost you is just, if not more important as knowing how much you are borrowing. The higher the interest rates for each loan, the higher the amount of money you’re expected to pay in the long run. Although the monthly installments for a longer repayment plan are smaller, you’ll pay back more money in the end due to high accrued interest.
Most people fall for the trap of looking at their monthly installments when evaluating the cost of an asset, rather than the total payable amount after borrowing. Using a simple loan calculator will help you make wise decisions by finding the total amount of money you’ll end up paying based on the loan amount, interest rates, and the period you’ll take to repay.
- Don’t Miss Payments
When borrowing a certain amount of money, you get into an agreement with the lender to pay off a monthly amount agreed upon prior to payments. Defaulting this agreement attracts a late fee charge that has a bigger impact on your loan than you think. If you’re 30 days late or more on your payment, the creditor files your late repayment to credit bureaus. This negatively affects your credit score.
The general rule of thumb is to use a calendar system on your smartphone or computer to remind you several days before the due dates. If you miss the due dates, don’t wait until the following month to settle the payment. Try to pay them as soon as you remember to avoid listing in the credit bureaus.
- Understand the Effects of Debt on Your Credit Score
Your debts affect not only your interest rates, but your credit score as well. A low credit score makes getting approved for future loans very difficult. The alternative, when borrowing money with a low credit score, is to borrow at a higher interest rate.
Here are some of the ways debt can affect your credit score:
- Maxing out your credit cards significantly brings your credit scores down– You should not spend more than 30% of your available credit to maintain a superb credit score.
- Inactive credit card closed out – swearing not to borrow ever again seems like a great move, it might actually deteriorate your credit score. If you don’t borrow, you can’t build a positive payment history hence poor credit score. If you opened a credit card for a promotion and forgot you even had it, companies will close the account due to inactivity. When cards are closed out, this can have a negative impact on your credit score.
- Late payments mean lower credit score– If your score was previously higher than 780, a default in payment for more than 30 days could significantly drop your credit score by 90-110 points.
- Applying for too many credit cards lowers your score- When you apply for a new credit card, t a hard inquiry is made on your credit report. Too many inquiries in a period of time, lowers your credit score regardless if you are approved or not.
With this information, it is crucial for you to make wise decisions about managing your debt while keeping your credit score in mind. This helps you to inadvertently avoid taking actions that could otherwise make your borrowing costlier in the future.
- Choose a Debt Repayment Strategy
If you’ve decided to repay all your debts aggressively, you need to come up with a working strategy. Your strategy will require you to decide on:
- Which debts you want to pay off first
- Which debts you want to pay off early
With either of these debt reducing approaches, these strategies can help you settle debts in the shortest time frame. Take time to evaluate which approach will fit your financial situation.
- Cut Your Budget to Pay More Towards Your Debt
Commitment towards repaying your debts means putting as much money as possible towards achieving your goal.
You can significantly increase extra funds by tracking your monthly spending and creating a viable budget. Your budget should be realistic, covering all your necessary monthly expenses while limiting impulse and unnecessary buying.
After determining the maximum amount of extra money you can get, devote it to debt reduction. You can set up an automatic payment from your paycheck to ensure the extra amount goes directly into repaying your loan.
- Get Help If You Are Struggling to Make the Payments
If you can’t pay all your debts on time, seeking an outside advisor might be in your best interest. The best option is to talk to other creditors who will advise you according to the available options you have.
There are critical times when you need a personal loan to pay off debt. Some financial institutions offer reliable debt relief to rebuild your credit in such stressful moments. Here are some of the benefits of taking a personal loan to pay off your credit card debts:
- Get lower interest rates- The interest rates of credit cards are usually high and can go up to 47%, whereas personal loans have a relatively lower interest rate ranging from 10-25%. The high credit card loans result in debt multiplication within a very short period.
- Consolidate your payment into one– Consolidating different credit cards into one personal payment is a great achievement. This will help you focus your time, money, and attention into one simple payment rather than many small debts that always nip at your heels.
Heritage Financial Has Got You Covered
Heritage Financial Credit Union understands how important it is to be financially free. We have many products and services that can help with debt relief and/or credit rebuilding. Whether it’s a small personal loan or debt assistance/coaching, we’re here to help. Feel free to or call us at (845)-561-5607 and we will be more than willing to help you rebuild your credit.