Debt management is a practice that is always “in style,” whether economic times are good or bad. Effectively managing your debt prepares you to weather tough economic times, as well as to capitalize on a more robust economy. Here are some tips to help you get out, and stay out, of debt:
- Cancel all credit cards except one and pay the balance off monthly. If you don"t have them, you can"t use them. By limiting yourself to one credit card, you prevent yourself from maxing out several cards.
- Use a debit card instead of a credit card. A debit card offers all the convenience of a credit card, without adding to your indebtedness. The cost of a purchase is immediately deducted from your bank account. Since you can"t buy something unless you have the funds to cover it, using a debit card can help you live within your means.
- Avoid using credit for items that depreciate or have no income-producing potential. Buying on credit for items such as clothing, dining out, groceries, and vacations may cost you more in the long run. The value of these items doesn"t increase over time, and they may end up costing you even more if you don"t pay off your account each month and finance charges are added to the balance.
- Limit monthly installment payments to 10% of income. Credit may derail your budget if it exceeds amounts that you can repay. A rule of thumb is to limit payments on monthly installment debt (excluding a mortgage) to 10% of income.
- Comparison-shop for the lowest interest rate. Even a small difference in interest rates can make a big difference in the total interest you will pay over time.
- Set aside a cash reserve. A cash reserve can help you pay down your debts. If an emergency arises, you won"t need to borrow additional funds. You can use your savings to handle the crisis.
- Be cautious using your savings to pay off debts. While it seems reasonable to use low interest savings to pay off high interest debt, don"t delay a savings program, as you will lose the benefit of months or years of compound interest. A better approach may be to continue to pay down your debt in regular monthly installments, take on no new debt, and retain your current savings.
- Beware of debt consolidation loans. You can"t borrow your way out of debt. Debt consolidation loans reduce your total monthly payment by spreading your debt over a longer term, but you will end up paying more interest in the long run.
- Use credit wisely. Not all credit is bad. Wise uses of credit are those that help you prepare for the future by purchasing assets that appreciate, such as a home.
One of the chief causes of financial failure is credit abuse. Easy, accessible credit may tempt many people to "buy now and pay later." Credit card purchases that offer instant gratification with "no money down" can sink any ship if you lose track of spending. Reining in excessive spending habits may be difficult, but a little fiscal discipline can help you clear your debt and prepare for a sound financial future.
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