Techniques for Debt Management
Why Is Debt Management Important?
After attending university or making a major purchase, you may need to take out a loan and go into debt. Going into debt isn’t uncommon, even for moderately well-off families. However, properly managing your debt is essential, as it can directly impact your short-term and long-term financial health. Excessive debt can limit your financial freedom and prevent you from reaching your long-term goals, such as buying a home, starting a business, or saving for retirement. Simply put, by keeping your debt levels in check, you reduce the risk of defaulting on payments and facing financial hardship. Even if you start to generate large amounts of debt, effectively managing the debt can alleviate stress, knowing that you have a plan to pay off your debts over time.
Understanding Credit Scores and Their Impact
A credit score is a number that represents your likelihood of repaying borrowed money on time. An individual’s credit score can fluctuate based on their payment history, amounts owed, length of credit history, and several other factors. Having debt doesn’t necessarily mean that your credit score will decline. In fact, making timely payments on your debts can actually help improve your credit score. Making regular mortgage or auto loan payments is quite favorable for your credit score. However, on the flip side, regularly running late on your credit card payments can lower your score and indicate higher credit risk to lenders.
Debt Management Techniques
Now that you’ve built up debt, it’s important to start managing your payments. Whether it’s a new home, a new car, a college education, or a large amount of credit card debt, these tips and tricks can help you keep your debt in check.
- Create a Budget - One of the first steps should be creating a detailed budget that outlines your income, expenses, and outstanding debts. This process may help you better allocate your funds and strategize to pay off the debt over time.
- Monitor Your Spending - Take note of your monthly expenses to identify areas where you can reduce your spending. Making sacrifices in non-essential categories can free up more money for debt repayment, greatly accelerating the process. While working to pay off your existing debts, try to avoid taking on new debt.
- Prioritize Your Debts - Make a list of all your debts, including the outstanding balance, interest rate, and minimum monthly payment. While maintaining minimum monthly payments, try putting any additional funds in accounts with higher interest rates. This method is sometimes called Debt Stacking.
- Paying Bills on Time - Staying organized and paying your bills on time is a great financial habit that provides several benefits. It is a great way to reduce the chances of missing a payment, avoid late fees, and maintain a good credit score.
- Consolidate Debt - One method of streamlining the debt payment process is consolidating your debt into a single loan with a lower interest rate. Not only does this make it easier to manage your debts by combining them into one monthly payment, but it can also save you money on interest.
- Seek Professional Help - If you're struggling to manage your debt on your own, consider seeking help from a financial professional. They can provide advice to help you develop a debt repayment strategy that works for your situation.
Rebuilding Your Credit
Even if you've had several months of financial challenges or missed payments, it’s still possible to rebuild your credit. Once you’ve reviewed your credit reports, start by making timely payments on all your bills and debts. Payment history is one of the most significant factors affecting your credit score, so consistently paying on time will gradually improve your credit score. During this time, also try to stay within your credit limit. Making purchases with a credit card and paying off your balance each month is a great way to help rebuild your credit slowly. Paying with cash or debit card on the other hand, will have no effect.
