Being deeply in debt can skew your entire financial life. If your problem with debt becomes serious enough, it will affect your credit score. In turn, this can mean higher interest rates, higher insurance premiums, and even problems renting a house or apartment. What debt amounts to is borrowing from your future self, and your future self could end up being very disgusted with you due to all that debt you now have to pay off.
Ignoring your debts won’t make them go away any more than ignoring a bad tooth will make it go away. You need to take steps now to do a better job of managing your debts, and here are eight tips that could help.
1. Pay down your debts sooner
The easiest way to get out of debt is to pay down your debts quicker. Are you making just the minimum payments on your credit card debts or other revolving debts? Try doubling down on as many of them as you can, or at least paying significantly more than the minimum. In addition, if you pay half your monthly bill every two weeks, you’ll be making one extra payment over a year, which will help you pay off that debt sooner.
2. Set up automatic payments
You should be able to set up automatic bill pay through your bank. If not, you will need to go to your individual lenders, and arrange automatic payments through them. Automatic bill paying accomplishes two things. First, it eliminates the possibility of missing a payment. And second, it relieves you of the burden of having to remember when your payments are due.
3. Make a budget
Trying to manage your finances without a budget is like trying to assemble an IKEA desk without the instructions. You may get the job done but only by luck. If you truly want to do a better job of managing your finances, you need to create a budget or at least a spending plan. One of the simplest ways to budget is to divide your net income into three categories. The first should be your essential expenses (think utilities, rent, or mortgage payment, etc.). This should be 40% of your net income. The next 30% should be your savings. The final 30% is for your discretionary spending or the fun things in life.
4. Pay off the debt with the lowest balance
This is called the snowball method. The financial guru Dave Ramsey introduced it.. The psychology behind this is that you should be able to pay off the debt with the lowest balance very quickly. This will give you momentum (as well as more money) to pay off the debt with the second lowest balance, and so on. It’s like how a snowball rolling downhill gathers momentum.
5. Understand your limits
Maxing out your credit limits can do serious damage to your credit score. Keep the balances on your credit cards as low as possible. If you can keep their total below 30% of the total amount of credit you have available, your credit score will improve. And, of course, always make your payments on time.
6. Check your credit reports
You can get your credit reports free once a year from the credit reporting bureaus – TransUnion, Experian, and Equifax. Or you could get all three simultaneously on the site www.annualcreditreport.com. The reason to keep an eye on your credit reports is to spot errors that could be dragging down your credit score. Many people choose to get a free credit report every four months. This is a way to kind of monitor credit year-round, without having to pay a credit monitoring service.
7. Create an emergency fund
You can never know when you’ll run into a financial emergency, but you can bet you’ll have one. You could lose your job, your automobile could require an expensive repair, or you could suffer a serious illness. The only way to buffer yourself against one of these emergencies is to have an emergency fund. While many experts feel your fund should be the equivalent of six months’ of your living expenses, most people find this undoable. If you fall into this category, try for at least three months’ worth.
8. Stop using your credit cards
Unless you’re paying off your balances at the end of every month, using your credit cards means piling on more debt. So, stop using them. Try to pay cash for all your purchases. If you don’t have enough cash to pay for something, don’t buy it. We understand that takes a serious amount of self-control, but it’s the only way to keep from adding on debt. When you stop using your credit cards be sure continue making your monthly payments, This will improve your credit utilization rate, and will help your credit score.
Here were eight tips that could help you better manage your debts. If you don’t feel you can implement all of them this month, at least pick a couple and try to use them. Doing something is better than doing nothing – especially when it comes to your debts.