According to Lanemegleren, the average American household that has one or more credit cards carries around $16,000 in credit card debt. At any given time the average interest rate runs anywhere from 16 to 19%. Borrowing is not always bad; there are some debts that are considered to be good and necessary.
Borrowing for your college education or to buy a home is considered a sensible option. Just make sure to go only for the best rates and do not borrow more than what you can pay. On the other hand, a bad debt is incurring a debt for something that isn’t really necessary or is beyond your means like using your credit card for expensive meals or luxury vacations. These are expenses that you can instead save for.
Following are some tips to control and manage your personal debt:
- Get a grip on your spending habits.
A lot of people spend a lot of money buying on impulse. List down and analyze your regular monthly expenditures. Cut down on items that are not really necessary and set aside the money you save to pay off your existing debts.
- Settle first the debts that bear higher interest rates.
You can get out of debt more quickly if you prioritize reducing the balance of the credit card or loan that charges the highest interest rate. Just make sure to make at least the minimum payments for the rest of your debts. Once the priority debt is fully settled, focus on the one that has the second highest interest rate, and so on.
- Mind where you obtain credit.
Although it is very tempting to dip into your 401k or borrow against your home, it is a very risky proposition. For one, you could possibly lose your home or you may fall short of your investment target once your time to retire comes.
- Prepare for emergencies.
Make sure you save at least an equivalent of 3 to 6 months’ worth of living expenses to be used for emergency purposes. If you have nothing stowed for emergencies like a damaged car or broken heating system, your finances may be seriously upset.
- Don’t be over eager in paying off your mortgage.
If you have other debts to pay, do not put all your available funds to pay your mortgage off. For one, mortgages usually charge lower interest rates than most other debts. You can opt for refinancing if you wish to lower your monthly payments.
- Never fall for the minimum payment trap.
Paying just the minimum due on all your credit cards will only cover the interest and very little of the principal. Thus, it will take you many years to fully pay all your debts. In essence, you will end up paying a lot more in finance charges than the original amount you borrowed or charged to your card.
- Don’t hesitate to ask for help if you need it.
If you feel your debt is getting out of hand, seek help before it’s too late. You can consult a debt counselor to find ways on how to better manage your finances. Just be wary of unscrupulous debt counseling agencies out there that are only after a quick buck.
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