Learning how to manage debt properly is the best way to secure your finances. Some people believe that to keep debt from ruining your finances, you have to stop using it.
Well in this society, that is not really possible. Using credit is already the norm. Even if we will only buy something worth $10 or less, we tend to use our credit card for it. That’s how much we have gotten used to this.
The truth is, you cannot blame the average consumer for being this way. Using credit cards is more convenient and will also protect your money. But sometimes, convenience is what makes it dangerous. There are times when we become careless with it. We keep on using it without considering how it can compromise our financial future.
Just like what happened right now. Statistics reveal that the overall household debt grew by $155 billion during the first quarter of the year alone. It brought the total debt to $14.3 trillion. It is now higher by more than a trillion compared to the peak of the recession in 2008
With what happened during the coronavirus pandemic and the recession, we can assume that the debt of American consumers will continue to rise. The health and financial crisis are both leading to the rising unemployment rate in the country.
Obviously, the lack of income will push people to use their credit cards to make ends meet. All of these events will make debt even more pronounced in the country. How can you make sure that your debt will not completely ruin your financial future?
4 rules that will help you manage debt properly
The answer to the last question is you need to manage debt properly. If there’s no escaping the use of debt, you just have to learn how to manage it. That’s the best way you stay in full control of your credit at all times.
To manage your debts you need to follow 4 basic rules.
Maintain a list of all your debts
One of the best ways to stay on top of your debts is to make sure you know how much you owe exactly. If you want to deal with your credit issues, that’s the best way to start. By understanding the gravity of your debt problem, it’s easier for you to identify the perfect solution.
Just make a simple list of the different debts that you owe. Include important details like the creditor or lender, the amount you owe, the interest rate, and the due date. This list will allow you to stay on top of your debt situation. If you see that you’re borrowing too much, you can pull back and stop using credit. You can decide to be aggressive in paying off what you owe.
Calculate what each debt is costing you
Once you have a list of all your debts, this next rule should be easier to accomplish. You have to calculate how much every debt is costing you. This can easily be done by understanding the terms of your debts. Usually, if you have a low balance and a low-interest rate, the debt will not be costing you a lot. But the higher the balance and the interest rate goes, the higher it will cost you.
When you have done your calculations, you can rank them according to the debt with the highest balance or the one with the highest interest rate. It’s best to put your priority debt on top of the list. That way, if you happen to get extra cash, you know which debt should be paid off first.
Regularly check your credit report
Another rule that will help you manage debt properly is checking your credit report regularly. Sometimes, you think that your debt and finances are okay. But what you didn’t know, is that your information was compromised after a company you transacted with became a victim of a data breach. Your information was used to open new lines of credit.
If you check your credit report regularly, you will spot the new credit account that was opened under your name. You can call out the credit bureau and report that it was not yours. When they investigate and prove that it wasn’t your doing, then you don’t have to pay for anything. But what if you didn’t check your credit report? You will be left to pay for this debt that you did not make.
Obviously, nobody wants that. So just check your credit report regularly. You might also be able to spot mistakes that the creditor or lender submitted. These mistakes might pull your credit score down. It’s best to have them corrected as early as possible.
Know where to get help just in case
You should also have a backup plan just in case. Even if you can pay off your debts right now, you don’t know what will happen in the future. Make sure you familiarize yourself with your options to get debt help. That way, you can immediately act in case something compromises your ability to pay your debts.
Take the current events as an example. A lot of people are struggling to pay their debts because of job loss or the recession. One survey revealed that 28% of the respondents have reached out to their creditor or service provider and asked for a new payment arrangement. You need to be ready to do this if things suddenly become hard for you to pay off. That way, the problem will not be prolonged and you can settle things with your creditors.
That’s how you can manage debt properly even if you can no longer afford it.
Tips to manage debt properly
Now that you know the rules that you need to follow to manage your debts, here are tips that will help become a better credit user.
Know it’s purpose
Start by understanding the purpose of debt in your life. Will you use it to improve your lifestyle? Or will you use it to extend your purchasing power? Debt can be used for a lot of things. If you want to manage debt properly, you have to start by using it the right way.
Here’s one important tip. Use debt to improve something in your life – specifically your ability to earn more. You can use it to buy something that will increase your personal net worth. Like a house for example. Or you can use it to pay for a course or seminar that will improve your skills. You can also use debt to start a new business. These are the things that you can use debt for and it will bring something positive to your financial future.
Another important tip that will help you manage debt properly is if you monitor everything. How you spend, what debts you have, debt-to-income ratio, credit score – these are only a few of the finance-related things that you need to monitor. If you track these, you will maintain full control of your finances. Your debts will not have a chance to grow because you can spot it immediately. In case something might compromise your financial position, you can take action to keep it from happening.