Summary
Many people struggle with their finances and take on multiple debts that they don’t know how to manage. While it can seem overwhelming to deal with credit card debt, it doesn’t have to be difficult.
Keep reading to learn how to get started with your debt management and discover other tips to help you to pay your credit cards and become debt free.
Getting Started
If you owe money, then keep reading for advice on how to get started with managing your debt.
Content
- Assess your debt
- Build emergency savings
- Figure out your debt to income ratio
- Make a plan
- Find a system that works for you
- Tips for debt management
- Conclusion
Assess your debt
When you owe money to others, the first step to tackling this debt is to know how much of it there is. Take some time to list out all your debts. Note the amount you owe, the monthly payment, its due date, and the interest rate for each debt. Include credit cards, your mortgage loan, medical debt, private student loans, personal loans, your car loan, and other debts.
Seeing all your credit card debt and loan payments listed in one place will help you get an idea of the best way to begin repaying debt. It is recommended to refresh this list monthly as you make payments. This way you can see your progress in real-time, which will only motivate you to keep going.
You can reference your credit report to ensure that you are aware of all your open credit accounts.
Build emergency savings
Having emergency savings is the best way to keep yourself from taking on any unnecessary debt. An emergency fund can protect you from using a credit card for an unexpected expense. Ideally, emergency savings should be enough to cover three to six months of living expenses.
But if you are just beginning to build your savings then start with small goals. Aim to save a small fund of $1,000 and once you have done that you can make a new goal to save a full month’s worth of expenses. You can keep adjusting your goals as you meet them until you have several months of expenses saved.
Figure out debt to income ratio
Debt to income ratio, or DTI, measures the amount you are spending on monthly debt payments compared to the amount of money you’re making each month. It is recommended that your DTI does not go over 20%. Take into account all secured debt and unsecured debt.
To figure out your DTI you should divide the total amount spent on debt payments each month by your gross monthly income. Having a DTI that is too high can lead to missed payments and keep you from saving. Monitoring your DTI will help you to manage your debt and keep you from becoming overwhelmed.
Make a plan
Tracking all the debt you owe will help you to come up with a debt management plan to pay it off. You can then create a list of your debts in order of what you want to pay off first and develop a payment schedule.
People usually order their payment plan in one of two ways: to prioritize paying off high-interest debt or prioritize paying off debts from the smallest amount owed to the largest.
If you choose to pay your debts that have the highest interest first, then you can tackle the accounts that would cost you the most money over time. Or if you opt to pay off smaller debts first, you will experience progress sooner and consistently. This progress will help you to stay motivated in your debt management.
Find a system that works for you
Once you have your debt management plan made, you can find methods of making payments and tracking the progress that works best for you.
You can track your due dates on a calendar, with your phone, or using an app. It may be beneficial to set up automatic monthly payments for each debt account so that you never miss a payment.
You can create a system that will work for you and adjust it later if you need to. Making sure to mark your payment progress each month will allow you to see if your system needs adjusting.
Tips for Debt Management
These steps will give you a strong start in managing your credit cards and other debt. As you continue to make payments and watch your debt dwindle, you can benefit from taking further action.
Make on-time payments
This one may seem like it goes without saying but your payment history accounts for one-third of your overall credit score rating. Missing even one payment can significantly affect your score.
Credit bureaus keep track of the length of time your payment is overdue, so make sure to pay overdue balances as soon as you can.
Missing a payment will also result in late fees or other finance charges, meaning you will just continue to owe more money each time you miss one. You may have interest rates increase if you continue to send in payments late or your debt may be sent to a debt collector.
If you regularly forget to make a payment, setting up automatic monthly payments can help you avoid these issues.
Pay more than the minimum payments
Paying more than the minimum payments on your credit card debt is a great way to quickly reduce the amount you owe.
Whenever you can afford it, you should pay more than the lowest balance due. Doing so can help you to spend less on interest and get rid of your debt faster. You may also see an increase in your credit score when you pay more than the minimum payment.
It is worth noting that if you have trouble paying any extra towards loans, credit cards, or car payments, then aim to continue making minimum payments.
Understand your credit score
Understanding how credit scores work and what exactly affects them is important when you’re dealing with debt. Your credit score affects your eligibility for loans such as auto and homeowner loans and can even affect your ability to rent. Maintaining a good score, even while you are in debt, is crucial for many parts of your life.
Knowing how payment and account history affects your score can allow you to retain a good credit score even while you owe lenders. It can also help you to increase your score if you currently have a low score.
Monitor your credit score
You should check your credit score regularly to ensure that you are making all your payments on time and that all your credit information is accurate.
Many websites, banks, and financial apps will allow you to keep track of your credit score. You can also check your score through a credit bureau, like Experian and TransUnion, once or twice a year.
Keep credit utilization ratio low
Your credit utilization ratio is the amount of credit you have used out of all the credit you have available. In general, you want to keep your credit utilization ratio at 30% or lower. So, if you have a credit card that has a credit limit of $1,000 then you should not have any more than $300 owed on it at a time.
Having a high credit utilization ratio can negatively impact you by causing a higher interest rate and lower credit limits on credit cards. You may be denied other lines of credit in the future because of it.
Make a budget and stick to it
Creating a budget is one of the best things you can do for your finances. It is especially important when you are managing debt.
Track how much money you bring in each month, as well as what your monthly expenses are. This will help you become aware of how much of your budget you can put toward debt payments.
If you have excess money each month then you know that you can make extra payments and pay off debt faster. Or if you are spending most of what you make then you know that you won’t be able to afford to take on any more debt payments.
Either way, you’ll have a better idea of where you stand with debt management and have more control over your finances.
Avoid new debt
While you are working to pay off the debt, you should avoid taking out any more loans or opening any credit cards. Having new debt will make it more likely that you will not be able to keep up with payments. You may also see a decrease in your credit score if you have too many lines of credit or too much available credit used.
Lower your rates
As you pay off the debt you may see improvements in your credit score. If that is the case, then you may qualify for a lower interest rate on open lines of credit. It is a good idea to call your credit card company and request a lower rate on your debt. If your request is approved, then you will save money on interest and be able to pay down your debt even sooner.
Don’t close old accounts
When you begin implementing your debt management plan, you will begin to completely pay off credit cards and other loans. While it may be tempting to close out old credit accounts once they’re paid off, this can look bad for your credit history and can actually hurt your credit score. You should aim to keep your oldest line of credit open as it will positively impact your score and keep your interest rates from going up.
Make your credit work for you
In general, we want to keep our debts low and pay off credit balances as soon as possible. But there are times when credit cards and debt may be beneficial to you.
Learning about the positive ways that debt can impact you can help you to use it in a smarter way. It has become common for credit cards to offer cash back on purchases made, so you can earn money back as you spend. If you qualify for a credit card that has a low interest rate, that may be beneficial for you as well.
Developing healthy spending when it comes to credit cards will allow you to keep debts low and still experience the benefits of using credit cards.
Don’t apply for credit often
This is a general rule to follow, even if you’re not actively trying to manage debt. Applying for credit cards or loans results in a credit inquiry to the bureaus, which can negatively impact your credit score. Because of this, you want to be mindful of how often you apply for any kind of credit.
Opening many credit cards also makes it more likely that you will overspend and have large amounts of debt to deal with. Being thoughtful about the kind of credit cards you want can help you to avoid these issues.
Contact a credit professional
There is no shame in seeking professional help when you need it. Many people struggle with money management, and with managing debt in particular.
If you find that you are overwhelmed with debt, struggling to make payments, or not seeing progress then it may be time to see a financial advisor or credit counselor. Financial advisors and credit repair companies are there to help you deal with debt.
These professionals can assist you in negotiating with creditors to lower rates, developing a debt repayment plan, or with a debt settlement. A good credit counselor may also help you to consolidate credit card debt with a debt consolidation loan. If you can consolidate debt, then it will greatly cut down on what you owe. You can also compare debt settlement programs to find the best consolidation loans for you. They can also help you if there are errors or inaccuracies on your credit report.
There may also be other instances when it is appropriate to seek out credit counselors. If you experience a loss of income, an increase in medical bills, or another major life change that affects your finances, utilizing the help of credit counseling or a debt settlement company can help you to better deal with debt.
Conclusion
No matter what your financial situation is, you can easily benefit from these tips to manage any current debts. Use the steps listed in the beginning to get started dealing with your debt and utilize the tips here to make further progress. Reach out to a financial advisor or a certified credit counselor if you feel that you need professional help in dealing with a debt collector or if you need debt consolidation.