Managing debt is extremely important for your financial health and is actively common in most peoples lives. Unfortunately, many people don’t understand debt or are unsure of how to get out of it. I attest, it is not an easy task, but is rewarding once you find a path to meet your goals. There are many different types of debt such as, credit card debt, student loan debt, car loan debt, home loan debt, etc. These specific categories tend to be more difficult for people to get a grasp of, so some people just end up thinking they can just pay the minimum and ignore it altogether, so that they can enjoy the money they have coming in.
“Debt is defined as money you owe to a person or a business.”
By making the minimum payment on anything, you incur more interest over a period of time. Credit card companies for instance, want you to pay the least amount, so they can continue to add interest to the overall amount. The less you pay monthly, the more interest you will end up incurring once you finally pay off the credit card. The best thing someone can do is to put the maximum their finances will allow or at least more than the minimum. I’ll admit, I hate making payments towards my credit cards, but who doesn’t? I want to keep every penny I make to myself, but I decided to sign up for a credit card to borrow someone else’s money. My goal is always to pay off as much as I possibly can because I don’t want to give loan companies more money than I have to.
Paying more to you credit card comes with higher responsibility. What I mean is, if the credit card companies see that you are consistent with your payments and constantly pay way more than the minimum, they’ll be more than happy to raise your limit, so you can spend more. We think this is awesome because we can charge even more money to the credit card, if needed, but this is another way for the credit card company to keep taking your money.
Tip* If you pay your credit cards off before your next minimum payment is due, you can avoid incurring interest. BUT, if you do not have credit, it is okay to have interest, as this will help build your credit score.
If you make payment 15 days before your payment is due and then again 3 days prior, this will help increase your credit score almost twice as fast.
Credit Score and Debt
Debt in general can be stressful, but it can also help with your credit score. You’re credit score plays a key factor in deciding your financial situation. If you rent an apartment for example, they want to know that you credit is in good standings and you’ll be able to make your payment on time each month. When buying a car, if you have bad/ low credit, you’ll probably have a higher interest on your monthly payments. This is also a determining factor if you need to take out a personal loan. If you have bad credit, why would someone want to loan you money? Bad credit can happen for many reasons such as, not paying bills, not paying bills on time, or you simply just can’t pay your bills for other personal reasons out of your control.
“Credit score is the prediction of your credit behavior, such as how likely you are to pay back a loan on time, based on history.”
Anyone can manage debt, as long as they are willing to do the work. It’s not always fun, but the outcome is worth it. Check out my post, How to Budget Your Money, to learn more about how to create a budget to get out of debt. Understanding how to budget is the first step to managing debt. You’ll want to also determine a budgeting technique that works best for your financial situation. The specific technique that works best for your situation, will in turn help you get to your goals. If you can make a plan for yourself, like assessing how much of your income you want to go to your savings or how much of your monthly income should go towards your debt, you’re already one step ahead.