Debt is a negative word in many households, often depicting stress, credit damage and income loss. Many people are anxious to pay off all debts as soon as possible to rid themselves of the risks and emotional side effects. Although too much debt can definitely cause these outcomes, using it as a tool can lead to positive results.
Careful spending and an understanding of the Five Factors of credit scoring is essential. If you are still wondering about how to manage debts, consider the following dos and don’ts.
- DO: Prioritize revolving debt. Credit card debt is a catalyst for score damage and depleted savings. A NerdWallet analysis revealed that the average household carried $15,762 in credit card debt in 2015. The danger of this debt type is high interest and the option of minimum payments.
For example, suppose you have $5,000 in credit card debt. The APR attached to your account is 18%. Your creditor only requires two percent of the balance to be paid each month—in this case, $125. Assuming you continue making the same payment each month, it would take more than five years to repay your debt, which will have ballooned to $7,693.
Take control of your credit health by prioritizing revolving consumer debt above all others. Don’t waste your money on unnecessary interest payments.
- DON’T: Overthink installment accounts. Unlike revolving debt, installment debt has a fixed interest rate attached, allowing for predictable and equal monthly payments. Fixed mortgages and auto loans are common types of installment debt. While it’s natural to dread long-term burdens, they have the power to strengthen your credit score with a stable payment history. Resist the urge to repay these debts more quickly than necessary.
- DO: Consider refinancing. If the balance of your installment debt is too high, consider refinancing. An improved credit score could qualify you for better rates, saving you thousands in interest payments. Talk to a financial planner about your concerns and ask them to determine if refinancing is the wise choice.
- DON’T: Discount investment opportunities. Repaying debts too quickly often means missing opportunities to invest. In addition to an emergency fund, saving for retirement is essential to securing your post-employment income. Redirecting these funds to current debt could harm your credit and financial safety in the years ahead. Weigh the risks carefully before acting on emotion.
- DO: Consult a professional. The balance of debt is essential to credit health, and it’s helpful to consult a professional along the way. Download our free budget template to help guide your discussion and create a list of your long-term goals. With the right approach, positive debt can pave the way for financial strength.