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How To Manage Debt
Back In Control
How did I ever get in debt? Well, first off, my parents never taught me about credit cards and interest rates, etc. So, when I first got married, my husband and I started using credit cards. I didn't understand how compounded interest works. If the interest rate was 10%, I figured if I borrowed $1,000.00, I'd only be paying an extra $100 back. We could afford the minimum payments ~ what a deal! Truth of the matter is, even if you borrow $3,000.00 at a 1.99% interest rate and just pay the minimum, it'll take you 7 or 8 years to pay it off!
Years later, I realized we just kept using our revolving credit and it never seemed to get paid down. I read a book or two about money management, and the way we got OUT of DEBT was to pay extra on the higher interest credit cards first. Once those credit cards were paid, we then paid extra on the lesser interest credit cards.
To protect your credit score, never charge more than 30% of your gross balance available on any card. If you must be in debt, keep the interest rates as low as possible. Transfer higher rate credit card balances to lower rate credit card. Your payment might be a little higher each month, but if you can do it, DO IT.
To keep your credit score strong, don't close your lines of credit, even if it's paid in full. When you close a line of credit, your credit history for that closed account is no longer reported to the bureaus. On the other hand, sometimes it's advantageous to close those high-interest credit lines because available credit may be used in analyzing your DTI (Debt To Income Ratio) when it comes to a major purchase.
Speaking of "borrowing power", if you own your own business and take so many write-offs that you really don't show much of an income, should you ever need to make a major purchase, this may hurt you. You must show the income/ability to re-pay that loan.
Monitor your credit report always. Some credit card companies offer a quarterly report from one major reporting agency for maybe $5.00 a month. Otherwise, you're entitled to a FREE copy of your credit report annually from one of the three bureaus. Remember that every time your credit is run by a potential loan company, your score gets dinged.
Managing one's own debt is the safest thing anyone can do. But don't charge what you can't pay off in a reasonable amount of time. This will protect you when your creditors change their terms (increase the interest rate) and/or reduce your credit limit, causing you to be in a higher percentage of debt on that card! President Obama is aware of these tactics and hopefully will be able to stop creditors from victimizing people.
And, you might not think this is important, but NEVER be LATE on your payments, not to the credit card company, and not to any creditor that appears on your credit report. Every late payment is recorded and can make or break your loan approvals when you really need it.
If you bought a home and were forced to get into it with an adjustable rate mortgage (ARM) like I was, as soon as my mandatory term on the ARM was complete, I REFINANCED into a FIXED rate, and I bought the interest rate down, saving thousands more over the term of my loan. Also, try to pay at least one extra house payment per year. You'll save tons more money than you invest that way! Another way to accomplish this is making 1/2 your house payment every two weeks. It ends up to be an extra payment per year just the same. I used to just divide the extra payment by 12 and up my monthly payment by that amount.
Don't cash in your 401K! That's a big mistake. Keep your investments working for you, no matter how badly you may be in debt. Save your pocket change; do whatever you can to save some money for those rainy days, because they WILL come.
Living debt-free (or managing your debt SMARTER) is the wealthiest way anyone can live. I've met people who make tons of money, but have no life because they have the bills keeping them bound up like a convict in handcuffs. Budget, and do everything you can to take control of your debt. Be patient, follow these suggestions and you will eventually be back in control!