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Top 8 Things to Know About Controlling Debt
From Nance Kelly
When it comes to controlling debt, or getting out of debt, there is no one-size-fits-all solution. There is, however, one constant when it comes to controlling debt and getting out of debt: knowledge. Learn the 8 things you need to know in order to control your debt rather than allow it to control you.
1) Good Debt Exists
Despite what some people (coughcoughDaveRamseycoughcough) will have you believe, some debt is actually good.
Borrowing money to purchase a home, or to complete your education, is generally considered "good" debt; the asset you're gaining - and education is an asset - continues to appreciate in value as the principal balance of your loan decreases. Add into that a generally lower interest rate and a tax deduction on your interest payments, and it's win-win.
2) And Of Course, So Does Bad Debt
The average American household carries about $9,300 in credit card debt according to CardWeb.com.
Most credit cards carry an interest rate in the mid to high teens, so using it to pay for consumable items like meals or vacations that you couldn't otherwise afford can rack up the debt pretty quickly, and leave you with little to show for it but a sunburn and too-tight pants. If you can't pay for something over the next month or two, you probably can't afford it.
3) Controlling Your Spending Is the First Step to Controlling Debt
If you don't spend, you don't owe, pretty simple, right? Most people spends thousands of dollars a year and have no idea where that money went.
Start by tracking your spending for a month using a small notebook to write down every cent you spend. At the end of the month, sit down and see where your money is going, and where you can cut back. If see that you're spending $20 a week on cofee, put that money instead into a savings account, and by the end of the year, you'll be $980 richer.
4) Pay the Debts With The Highest Interest Rate First
This seems like common sense, right? Some self-professed debt experts recommend starting first with the smallest debt, and ignoring interest rates all together. This can cost you hundreds or thousands of dollars in unnecessary interest payments.
Snowballing your debt is an easy way to get control of your debt and quickly eliminate it without going broke. Debts with higher interest rates continue to grow quickly, and by not tackling them first, it will take you longer to pay down your debt.
5) Plan for Emergencies, But Not At the Expense of Reducing Your Debt
Establishing an emergency fund is an excellent idea when you're getting serious about getting out of debt. It's important to remember, however, that emergencies may or may not happen, while your monthly bills, and their interest rates, are a sure thing.
Try to figure out how much you can afford to spend each month, and devote a small portion of that to savings, while you put the rest into getting your debt paid down to avoid paying more interest than you have to.
6) Don't Pay that Mortgage Off Yet!
A mortgage is "good debt", so you want to hang onto that one until the rest of your debts are paid off, you have a comfortable savings account established, and you're ready to start devoting some of your disposable income to paying off your house.
Interest rates on mortgages tend to be lower than on most other types of loans, including student loans, and the interest you pay is tax deductible up to $1 million. Consider putting that money into a mid-term CD instead to maximize your savings.
7) Never, Ever Pay the Minimum!
Sometimes you'll have to pay only the minimum, but if you can afford to pay more than the monthly minimum on your credit cards, DO IT!
With the change in banking regulations resulting in an increase in minimum credit card payments, your debt likely won't increase faster than you can pay it down. However, even an extra $10 a month on a $5000 balance at 18% interest can save you $4850 in interest and be paid off 262 months sooner.
8) If You Need Help, Get It
If you feel like you're drowning in debt, get help. There are a number of ways to deal with debt and the sooner you can get started, and get control over your debt, the less control your debt will have over your life.