Debt doesn't pose too many problems if you develop a habit of keeping balances low and paying off balances within a reasonable time frame. But if you ignore debt or allow balances to linger, carrying debt can start to negatively impact your personal finances and financing opportunities. Understand the cons of carrying debt, and take steps to fix debt problems.
Types of Debt
Debt refers to a type of loan or other financing obligation that carries from month to month. This can include monies owed to a lender for a mortgage, auto loan, student loan or other installment loans. Applying for loans and acquiring debt is often necessary to make home and auto purchases, but some consumers carry unnecessary long-term debt on revolving accounts such as credit cards and lines of credit.
Reason to Pay Off Debt
Paying off debt is an effective means of quickly boosting your personal credit score and qualifying for various types of loans and credit cards. MyFICO breaks down credit scoring, and according to this website, the balances consumers carry make up 30 percent of credit scores. It's understandable that someone who controls her spending and pays off debt completely within a short period will likely maintain a higher FICO credit score than someone who only pays the minimum on credit cards and carries high balances for years.
Debt and Interest
Debt involves interest; and the more debt you carry, the more you pay in interest. Creditors and lenders charge interest on a monthly basis, and interest is likened to a fee paid to use a credit card or acquire a loan. Some savvy borrowers choose short-term loans when financing a car or house to save on interest. But if carrying a credit card balance, you can reduce the amount of interest you pay by simply asking creditors for a reduction. Each credit card payment is subdivided into an interest payment and a principal payment. Creditors only apply a percentage of payments to the principal, and this percentage depends on how much is owed in interest for the month. Negotiate a lower rate, pay less interest and pay down your balance faster.
Limit Debt
Controlling the amount of debt you owe involves applying for few accounts. The more credit card accounts you hold and the more loans you apply for, the higher your chances of accumulating overwhelming debt. Retail stores are quick to offer in-house financing to satisfy material wants, and store charge accounts are frequently offered to store patrons. Use cash to control debt and help get rid of your balances.
Increase Payments
Having the means to increase payments to your creditors will require additional or disposable income. Understandably, extra income doesn't come easy for everyone. Resolving debt with little funds will require putting forth the extra effort and thinking of ways to increase your income, if only temporarily. Take advantage of overtime opportunities at work, find part-time or seasonal work, or de-clutter and sell personal unused items. Put every extra dollar towards your outstanding balances.
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