Let's face it— going into debt is a fact of life for many people. While we shudder at the word, not all debt is bad. Almost everyone gets into some debt at some point in their life. After all, most people often go into debt to buy a house or a car. However, getting into a mountain of debt is never good. It can take an emotional toll on a person and even hurt your credit score. The longer you're in debt, the higher your chances are of getting even deeper. Here are some tips for getting and staying out of debt.
The first thing you should do is review your finances and finding out what kind of debt you have. Then you can start making a budget to track and control your spending. On your budget sheet write down all your debts and monthly payments. If you're not sure where to start, download the Monthly Expenses Worksheet to track where you are now.
Most debt is probably from a loan of some kind. There are two main types of loans: secured and unsecured. Secured loans cover things like a car or a house and have fixed payments. On the other hand, unsecured loans cover things like credit or student loans. Payments for unsecured loans are more flexible. Learning to manage both will help you get out of debt faster and stop you from accumulating too much debt.
If you have a lot of different loans, they can easily become too much to handle. If that's the case, consider getting a consolidation loan. This means that all your unsecured loans are combined into one with new terms. Also, you only have to pay interest on one loan instead of several. There are pros and cons of loan consolidation, so be sure to compare what your payments or interest rates would be for consolidating versus your current plan. If you do get a consolidated loan, you may lose any benefits that were in the original terms of your loans.
Read more about consolidation loans here.
Credit may seem like free money, but it's not. Credit can be easy to pay with, but you can get into a lot of trouble if you aren't careful with it. It helps to avoid buying things on credit unless you don't have an option. For example, you may need to use it online, but you really don't need it for groceries or retail buys. Also, consider using cards with lower interest rates. If you have multiple cards, you may consider consolidating the debt from those cards into one. However, as stated earlier, there are pros and cons to doing this. Be sure to fully weigh your options before deciding.
Also, you should never buy anything on credit if you can't afford it with your current money. Treat credit as if you are paying right then. You may think you'll be able to pay it off when the bill comes, but you never know what other expenses or unexpected financial emergencies will arise prior to receiving your bill.
The best option for payment is using a debit card. It works just like a credit card but takes money from your bank account. However, debit cards can be riskier to use online than credit cards. This is because your debit card takes money straight out of your bank account. That means any thief who gets your card number can use the money in your bank account. Depending on what bank you use and if you file charges, you may be able to get reimbursed for the money that was stolen. Always be cautious when purchasing anything online. One way to do this is to check to see if you have a secure connection with the website you are using.
Learn more about controlling your spending here.
Compulsive debt is when your debt is constant and goes past 20% of your yearly income (after taxes, benefits, etc.). Here are some signs and causes of compulsive debt:
To avoid getting into this kind of debt you should try to avoid taking on debt that goes over 20% of your yearly income, aside from house payments/rent.
Here are a few more ways you can help yourself manage your finances and minimize your debt:
Staying out of debt has a lot of benefits, and you'll be glad you did! For example, you'll have more money to spend on things you want and need without having to worry about your payments or interest. Also, it will help you avoid a bad credit history, which can affect your chances of getting future loans or credit cards.