Whether you're swimming in debt or drowning in it, effectively managing debt is essential to your financial health. Knowing how much you owe and grasping the underlying reasons for going into debt can help you eliminate crippling credit card balances.
- Know how much you owe: It's important to add up your account balances and determine exactly how much you owe. Write this figure down, and affirm that you've taken the first step toward managing debt.
- Categorize your debt: The goal of your debt management plan is to eliminate high interest rate consumer debt. To meet this goal, you'll focus on credit card and other consumer debt, not including mortgage loans and student loans.
- Know the difference between interest rates and APR: Credit card companies often advertise low interest rates to attract customers, but they don't tell you about finance charges that can significantly add to your balance. The APR includes the interest rate and any fees and charges assessed to your account calculated on an annual basis.
- Prioritize Debts from highest to lowest APR: Financial expert Suze Orman recommends making a list of your debts, their APRs (see above), and the account balances. Arrange this list from highest APR to lowest. Pay the most you can afford each month toward the highest APR debt. Make minimum payments on your other debts. When you've paid off the highest APR account, apply that payment amount toward the next account, and so on.
- Establish a cash budget: Meeting your household expenses and other needs on a cash basis is essential to financial solvency. Look for ways to eliminate or cut back on non-essential expenses. Getting out of debt is your goal, and each thing you don't buy puts you one step closer!
- Stop using credit cards: Carry only cash and your debit card. If you keep using credit cards, it will be difficult if not impossible to get out of debt. Credit card companies use methods of calculating finance charges based on previous debt, and new debt incurred during the billing cycle. You don't have to close your accounts, but do stop using credit cards. Your credit score depends in part upon having open accounts and how you use those accounts.
- Use shopping lists: Retailers know how to get your attention! Using shopping lists can help you avoid making impulsive purchases.
- Understand why you buy: If you're a recreational shopper, tune in to what makes you want to shop. Do you shop when stressed or depressed, or to improve your self image? Understanding and addressing your reasons for excessive shopping can help you control spending.
- Don't live in the past: It's easy to blame yourself for getting into debt and making bad decisions. It's important to learn from mistakes, but replaying "woulda, coulda, shoulda" scenarios won't help you move toward financial security.
- Give yourself credit: No, not more credit cards! Instead, congratulate yourself for taking control of your finances and managing your debt.
Getting out of debt takes time and can be challenging, but focusing on the benefits of living debt free can help in accomplishing your goal.
Sources:
Suze Orman: Managing Debt
About the Author:
Karen Lawson started writing stories about birds and surfing at an early age. For more than ten years, she enjoyed a productive corporate career in mortgage banking before moving to Reno, Nevada in 1997. Karen earned BA and MA degrees in English (specializing in writing) at the University of Nevada. Significant areas of research and writing include truth and ethics in creative nonfiction, medical humanities, and the symbolism and lore of birds in American literature and culture. Karen has taught English at a community college, is writing a collection of poetry, and enjoys birdwatching and walking her basset hounds.
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