Debt may seem like the enemy to many of us, but it can also be part of a healthy financial existence if you know how to manage it. Also, it is rare that you can go through life without taking on debt at some point.
It’s important to be cautious, but not so scared that you miss out on opportunities — debt can be a useful tool when you take on the right kind of debt and handle it responsibly. For example, responsibly managed debt can help you build credit so you can achieve bigger life goals like buying a home. (You can check your credit scores for free on Credit.com to see where you stand.)
Here are the quick and simple rules to managing your debt responsibly.
1. Choose Wisely
The first step to taking on debt is analyzing your options. Whether you are picking a credit card, applying for a mortgage, or getting an auto or student loan, it’s a good idea to hunt for the best terms available, from low interest rates to pre-payment options. (The best terms go to people with good credit, so making sure your credit profile looks as good as possible to lenders can help you save money — this interactive calculator can give you an idea of how much.) You’ll want to consider the monthly amount you are paying, and how long you’ll be paying it. You should also understand how much you are borrowing, and how much interest you will pay over the life of the loan.
2. Establish a Plan
Once you have debt, be sure that you pay it as agreed. Debt can be an important financial tool, but it can also be an anchor — and you want a plan to eventually eliminate debt. Paying on time helps in a couple of ways — you avoid fees and penalties for paying late, and it helps your credit scores (and those, in turn, can affect what you pay for insurance). You don’t want to pay more for your loan than you need to because of financial disorganization. Whether your answer is automated payments, staggering credit card dates or some other method, make it as easy and convenient for yourself as possible to get those payments in on time.
3. Keep Track
Keeping good records can help you know where you stand. Whether you choose an app or keep records with paper and pencil, you should be able to see how the payments are shrinking the debt. You can also record your progress on each debt, from personal loans to credit card debt.
If credit cards are causing — and recycling — part of the debt, impeding your progress, it may be time to take a close look at your household budget. If you’re using credit to make ends meet, the reason needs to be addressed, either by cutting spending or increasing income.
Finally, it’s important to build an emergency fund so you won’t be tempted to take on additional debt for unexpected expenses.
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