The sole purpose of personal finance management is to improve your financial status and managing debt is a fundamental aspect of your personal finance. Strategic management can help in efficient management of any kind of debt may it be credit card debt, student loans, auto loans or mortgages. Efficient debt management skills can not only reduce burden of financial stress but can also lead to better credit score which will enable consumers to have better control over finances in future. All it takes is careful observation and a little strategic planning to manage your debt.
Assess Your Debt Situation:
Careful assessment of the present debt is the first thing that anyone in debt must do. As only after completely describing the debt including all aspects of it like balances, interest rates and minimum payments prioritization can be done on the basis of balance, rate of interest and minimum balance required each month. Once the prioritization is done it becomes clear what debt should be paid first.
Create a Budget:
Creating a budget can really speed up the process of debt repayment. Now you must be wondering how budgeting is linked to debt repayment. Budgeting can point out the areas where you are actually spending extra each month so that you can cut those expenses and allocate some extra funds towards the det repayment. This will speed up the payoff process as you would be making payments greater than the minimum value each month. Not just in debt repayment budgeting will provide clarity about savings and investments. It will provide you the exact idea of how much you should be saving each month and how much you should be investing for your future goals.
Utilize the Debt Snowball or Debt Avalanche Method:
Debt repayment can trouble anyone especially when you have one two dets to pay, but strategic repayment can help substantially in managing repayments of multiple debts. There are two methods that can be used in repayment of the debt first is debt snowball and the second most commonly used method is debt avalanche method.
In the first method which is the snowball method for the repayment of the debts the debt with the minimum amount is paid off first along with the minimum payments of other debts. This simply means that you are making minimum payments for all the debts and allocating extra payment to the debt with the lowest balance amount. When this debt is paid off you have to allocate the extra payment to the next lowest amount hence creating a snowball effect.
The second method of repayment which is the debt avalanche method you focus on debts with the higher rate of interest. In this method you make minimum payments for all the debts and make some extra payments towards the debts with the higher interest. By following this method, you will end up saving a substantial amount of money on interest over time as you are reducing some amount of principal each time for the next month.
Consider Debt Consolidation:
If you have more than loan than it is quite obvious that these loans are at different interest rates and have different due dates every month. There is a high chance that you will miss payments as it is tough to keep track of payments for multiple debts and you will be paying different interest rates for each debt. A wise thing to do here would be to consolidate your debt into one loan with a relatively lower interest rate so that you will pay less interest and have just payment every month which means very less chances to make the payment late. Just by consolidating your debt you will be making payments on time and will save a lot of money in terms of the interest rate.
Negotiate with Creditors:
Lower interest rates can be offered by creditors like your bank primarily for marketing and promotional purposes all you need to do be on the watch regularly for such offers. If you are facing any kind of financial hardship like loss of income, medical emergency, or personal emergency you just need to contact your creditor and ask for financial assistance, most creditors have financial assistance where there will lower your interest rate and will create a payment plan for you in order to help you with the payments. This is actually beneficial for both creditor and customer as the creditor will recover the money and customer will be saved from a dent in his creditor score.
Monitor Your Credit Score Regularly:
Sole purpose of debt management is to create an amazing credit worthiness so that you would be in control of your finances and can tackle any urgent situation with the help of credit. Monitoring your credit report regularly will keep you updated with your credit score progress and will help you in pointing out the areas of improvement. By regularly checking your credit report regularly you will be able to point out the disputes and discrepancies in your credit report so that your credit history Is accurately described in your credit score.
Practice Responsible Credit Management:
An important key aspect of debt management is responsible repayment, which not only avoids any bad remark on your credit report but also improves chances for credit line increase and new loan offers from the creditors. More responsible a customer is in repaying the debt more offers for credit he will get from the creditor.
Responsible credit management is also reflected by a metric called credit utilization ratio. If you are keeping the utilization of your credit below 30 per cent you will have excellent chances to get a good credit score and also to get exciting offers from creditors. One should have unnecessary credit accounts as opening a new credit account requires a credit inquiry and each credit inquiry known as a hard pull will lower your credit score.
Debt is a form of money as money is something used for transactions and majority of people are using this form of money incorrectly. People usually buy liabilities using debt and assets using their income and get stuck in an endless loop where sometimes it can cost badly. The use of debt should be exactly in the opposite way it should be used to build assets and income should be used to pay for liabilities and your liabilities should be less than your income. This is the simplest way to create wealth. So, if you know how to manage debt you know how to manage wealth.
