In today’s world, debt is so integrated into our society that it is considered the normal way to pay for many things. These things include homes, college educations, cars, medical expenses (in some cases), vacations, and even clothing. If you are unable to buy a house or a vehicle with saved cash, you will likely end up using debt to pay for it. Debt can, in some cases, be a useful tool, but it can also get you into trouble if managed incorrectly.
If you know the facts and risks and follow sound financial practices, you can better handle debt-financed purchases. Here are seven key points that can help you manage debt well and eliminate it if possible.
1. Learn How to Establish Credit
If you don’t have any credit history, you probably won’t be able to borrow any money in the first place. Before you can purchase a car or house, you will need to build up your credit score. If you don’t, creditors will likely see you as too much of a risk because of your lack of adequate borrowing and repayment history.
Establishing credit typically begins with a secured credit card or store card, which you use to purchase something small and then pay it off in a short timeframe. After several months, you will have a better credit score and can apply for a standard (unsecured) credit card and repeat the process.
2. Know the Importance of Your FICO Score
Your credit score is the most significant number that creditors look at when evaluating your credit card applications, loans, and even mortgages. Pay attention to the things that can negatively impact your credit score, such as late payments, excessive balances, and having too few open accounts. This information will keep you in touch with your financial health status and help you make appropriate purchasing decisions.
3. Improve and Maintain a Good Credit Score
If you look up your credit score and find that it is too low, learn the next steps to improve it. Your credit score is not some magical random number that does whatever it wants to. You can control your credit score with sound decisions and strategy. If you manage your credit well and follow best practices, you can predictably build your credit score month after month until you have the credit score you desire. That credit score, in turn, will help you to get approved for the loans or cards that you want.
4. Regularly Check Your Credit Score for Free!
While you are building your credit score, you will need a way to check it for free regularly. If you are flying blind and don’t know your exact credit score, that will handicap you when it comes to applying for credit. You should review your credit report before you walk into the bank or fill out an online loan or credit card application.
This information can prevent your request from being denied, which could reduce your credit score. It can also give you an accurate picture of what cards and loans you should apply for because you can look at the average approved or required approval credit scores for many loans and cards. Sites like CreditKarma.com and others allow you access to this information, and you can get a free copy of your credit report each year from the three main credit bureaus.
5. Budget and Find Money to Eliminate Debt
Creating a budget may seem like something that would reduce your financial freedom and eliminate fun. However, you might be surprised by how far you can stretch your dollars when you spend your money intentionally rather than on impulse. If you create a budget plan, you might be able to find money to eliminate debt by paying much more than the minimum payments on each of your credit cards.
6. Always Pay More Than the Minimum Payment
If you only make the minimum payments, you will take over a decade to pay off most credit card balances! However, paying more than the minimum each month reduces the amount of time it will take to pay off each card. It can also dramatically decrease the amount of interest you’ll pay.
Credit card companies like it when you pay only the minimum because they make a lot more money on the balance owed. Credit card interest rates work on a compounding model, which means the total interest you’ll be required to pay to eliminate your balance goes up for every month you carry that balance. The longer you take to pay, the more you pay. The only way out of this vicious cycle of compounding interest is to pay more than the monthly minimums – as much as you can afford.
Keep in mind the recommended way to eliminate your credit card debt is to pay only the minimums on all but one card. Select that card based on the highest interest rate or the lowest balance. If you can pay off one card with the lowest balance, it will keep you motivated to pay off the others. Paying off the card with the highest interest rate first will save you the most money but could potentially take much longer if you have a high balance, which could lead to your getting discouraged and giving up. Only you know what motivates you, so choose a strategy that works for you and stick to it. You can get out of debt!
7. Ask for Help When Needed
If you have developed poor financial habits and tend to overspend regularly, it may be time to seek help in the form of credit counseling. You might also consider taking personal finance classes or joining a support group on credit debt elimination. There is nothing shameful about asking for help! It means you have a realistic view of your current circumstances and habits, have acknowledged that there is a problem, and are taking steps to solve it.
Hopefully, these tips prove helpful to you in your efforts to understand and manage your credit and debt. Controlling and eliminating debt are vital financial skills that will help you to prosper. They can help you achieve your goals and prepare for the future. If you have any suggestions, please share them in the comments below!