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How to Manage and Avoid Debt
Debt is sometimes an unavoidable product of being an adult with expenses and obligations. It is easy for consumers to get in over their heads with payments for credit cards, utilities and student loans, which are due every month at increasing interest rates. Fortunately, there are ways to manage your debt and hopefully avoid it altogether. Methods range from simply keeping your credit card balances low, to the more aggressive approach of consolidating many streams of debt into one payment.
Keep Your Credit Card Utilization Rate Low
For a consumer just starting out, obtaining a line of credit is an easy way to build his or her reputation with creditors. A credit card is the most widely available method of obtaining credit as many companies, such as banks and retailers, offer cards to consumers. Oftentimes, those new to the idea of having ‘free’ money, have a difficult time controlling their spending in the beginning. However, it is crucial for individuals is such a circumstance to use only the amount of credit they can afford to cover at the end of the month when the bill is due. Financial experts recommend that consumers keep their credit utilization low by not spending more than 30% of their credit limit at a time. For example, if your credit card limit is $1,000, then that means that your balance should never reach over $300, before making you payment in full. Having even lower utilization rates can increase your credit score.
Contact Your Creditors
If you are deep in debt, then utilization rates may not be applicable or helpful to you. When your balance is too high and the amount of interest you owe continues to rise, keeping up with payments can be difficult and even impossible. In that case, it is time to contact your creditor to explain your situation and hopefully negotiate more flexible payment options. Keep in mind that the terms of negotiating a reduction of your debt with your creditor may negatively affect your credit score, which can decrease your future borrowing abilities. Though, many consumers may agree that having a lower credit score is more advantageous than having your wages or your assets garnished due to non-payment.
Consolidate Your Debt
For consumers with high debt from several sources such as medical bills, credit cards, pay day loans, etc., it may not be possible to settle their debts by speaking to individual creditors, alone. Debt consolidation is alternative option for managing debt, making it easier than keeping up with multiple interest rates and due dates. Debt consolidation comes in many forms, but mainly it involves taking out an additional loan, at little to no interest, to pay off all other loans—whereby combining all debts into one monthly payment.
Consumers with credit card debt less than $3,000 have an easier time consolidating debt. The process is as simple as transferring the balance of multiple cards with high interest rates onto one card that has a zero-interest rate. Making payments is much easier when you do not have increasing interest rates to worry about. Keep in mind that zero interest rate offers are introductory and usually only last from six to 18 months. Try to pay off your debt completely during this time to avoid an even higher interest rate. Homeowners have several options for obtaining money to consolidate their debt as well, as a house is a valuable asset to borrow against. Getting a home equity line of credit, a second mortgage, or refinancing a mortgage are all ways that homeowners can obtain funds to pay off their bills.