Debt Management
Now that you have a better understanding of credit, let’s look at how you can manage your debt more broadly. Being able to effectively manage and reduce debt is essential to long-term financial stability.
Types of Debt
First, let’s look at some of the different types of debt you’ll need to manage.
- Secured Debt: This is debt that is backed by collateral like a car loan or a mortgage. If you fail to pay this debt, the lender can seize this collateral.
- Unsecured Debt: This is debt that isn’t backed by any collateral, meaning they typically have to have higher interest rates to account for the higher risk. Credit Cards fall into this category.
- Revolving Debt: This debt also covers Credit Cards, as it deals with debt where you can only borrow up to a limit and then repay over time. There can be overlap among these types of debt.
- Installment Debt: These are loans that have fixed payments over a set period of time. This commonly includes car loans and student loans.
Debt Management Strategies
Now let’s look at some great ways to keep all these different types of debt under control and working in your favor.
- Inventory Debts: As we’ve been saying, listing out your various finances is essential to having a proper understanding of your financial situation. Your debt is no different. Create a list of all of your debt to create a more transparent picture of your debt situation.
- Prioritize the Right Debt: Make sure you’re focusing on your high-interest debt first because these loans will cost you far more in the long term than low-interest debt. Alternatively, you could also start by simply paying off your smallest loans first in order to gain momentum, but these will very often be your high-interest loans anyway.
- Make a Repayment Plan: If you don’t focus on paying your debts, it can be very easy to ignore them. Make sure you’re sitting down and allocating proper funds to pay off this debt. Loans very often need to be treated as essentials when it comes to budgeting.
- Consolidate Debt: When possible, consider consolidating your debts into a single loan. This can often reduce the interest rate and simplify the repayment process.
- Avoid New Debt: Always be careful about taking on new loans when you’re still heavily focused on paying off other ones. Remember to avoid using credit cards on non-essential purchases to help avoid more debt.
- Make Extra Payments: If you have the financial ability, consider making extra payments on your debt ahead of time to help reduce the total interest you’ll pay overtime.
Conclusion
With our sections on debt and credit out of the way, you now have a basic understanding of the fundamentals of finance. Next, we’ll look towards some bigger investments that will help build wealth.