Some debt is inevitable for everyone, but the key to managing it properly is knowing that all debt is not created equally and that the amount of debt you incur should be a concern if you’re looking for a healthier wallet.
Know Your Debt
There are a variety of different types of debt, and they are all weighed differently by the credit bureaus. Here are the most common types of debt and its characteristics.
-
Secured Debt -This means that the borrower has pledged some type of collateral to back up the debt. Secured debt includes auto loans where the vehicle is the collateral for the loan and can be repossessed if timely payments are not made. Another common secured debt is a home mortgage where the property financed serves as collateral and the lender can foreclose and take possession of the home if the loan is not paid properly.
-
Unsecured Debt -This type of debt does not require collateral, and the loans are typically granted based on things like creditworthiness and salary. Unsecured debt includes personal loans and credit cards.
-
Revolving Debt - When a lender is given a line of credit that they can borrow from as needed, this is called revolving debt because you can spend up to your approved limit, pay the balance owed, then continue to borrow again within the credit limit. Credit cards and store accounts are the most common form of revolving debt.
The most important thing to remember when considering loans and credit cards is that unsecured debt is riskier to the lender, so these loans typically have a higher interest rate than secured debt. Remember that the lower the interest rate, the lower the payments and the less debt you incur from interest charges.
The Impact of Carrying High Debt
Do not underestimate the impact of carrying a high amount of debt. It can wreak havoc on your financial health including your daily lifestyle as well as your long-term goals. High amounts of debt can negatively impact your credit score, as lenders prefer to keep debt below 30%, and also results in large monthly payments that can quickly wreck your budget.
Simple Steps to Tackle Debt
Here are some simple things you can do to pay down your debt and get your finances back on track to reach your goals.
-
Snowball Your Way to Freedom - Using the debt snowball method requires you to focus on paying off the accounts with the smallest balances first. This allows you to free up money from those debt s that can now be used for the larger balance loans.
-
Avalanche: The Strategic Approach - Using the debt avalanche method requires you to focus on paying off high-interest debts by making minimum payments on all other accounts and paying more each month on the high-interest loan or credit card. This saves tons on interest and increases your credit score.
-
Smart Budgeting Tricks - You can be savvy with your budget without sacrificing fun. What’s the point of working so hard if you can’t splurge a little? Right? Be sure to include money in your budget for monthly recreational activities you enjoy, shopping, or a date night. Also, creating a reward system to treat yourself for sticking to your budget is a great idea. For example, take a weekend getaway for every $5k you deposit in your savings account.
-
Embrace Cash Payments - A great way to limit spending is to pay cash for your purchases. While it’s very easy to whip out the credit card for that $300 designer bag or golf clubs, if you vow to use cash and don’t have it in your wallet, you just saved your debt from growing. Getting in the habit of using cash will definitely benefit any budget.
-
Automate to Stay on Track - Whether your debt includes a financed car, a balance owed on a credit card, or a mortgage on your home, it is easier to stay on track to reach your debt -free goals if you take advantage of automated payments. Most lenders offer this perk where payments are automatically deducted from your bank account each month. This ensures your payments will always be on time, which maintains a good credit score, and also gives you hassle-free debt management with no worries.