Most households carry at least one type of debt, whether it is a mortgage, car loan, student loans or credit card debt. Debt payments can put a burden on your current finances and tie up your future income. The best detailed approach will depend on your situation, but everyone can use a few general strategies to control and manage debt.
Budget for Debt
Before you take on debt, make a plan for how you will afford your debt payments. The best way to do this is to create a balanced household budget. List all of your monthly household income in one column and your monthly household expenditures in another. Your debt payments will be part of your monthly expenditures, so you need to include all of your existing payments in your budget. You should also allocate some money toward savings for unexpected expenses. If you still have money available in your budget, that can go toward additional monthly debt payments.
Pay High Interest Debt Aggressively
Some types of debt hurt your budget more than others. When you already have debt, focus your attention on paying off the debt with the highest interest rate first. Debts that fall into this category typically include unsecured personal loans, payday loans and credit card debt. If you make extra payments on your debt with the highest interest rate, you can pay it off more quickly than scheduled and pay less interest on it. After you pay off the highest interest debt, focus your attention on the next highest one.
Protect Credit Score
Your credit score affects your likelihood of being able to obtain credit in the future. Lenders also consider your credit score when determining what interest rate you pay on new loans and credit cards. Protect your credit score by focusing on five areas of credit and debt management. First, and most importantly, pay all of your bills on time each month. Second, keep the amounts you owe as low as possible and keep credit card balances to a low percentage of the card limits. Third, use credit responsibly over a long time period. Fourth, manage a few different types of credit, including installment loans and revolving credit card accounts. Lastly, limit your applications for new credit.
Seek Professional Help
If you have gotten into more debt than you can handle, seek reputable professional assistance immediately. The sooner you address the problem, the more options you will have for how to repay your debt. In addition, addressing a debt problem early can help protect your credit score. Look for a nonprofit credit counseling organization that has a good reputation with the Better Business Bureau. Also search online for customer complaints about the company before paying it for any services.
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