Understanding Debt Management

Nowadays, almost everyone has a certain amount of debt to deal with, whether it be a small amount or large. Making an effort to manage your debt or having a plan on doing so can help you prevent your debt from getting out of control.

What is debt management?

This is the planning process for your debt, liabilities, and repayments. You have the option of doing this yourself or having a third-party negotiator. They are usually referred to as credit counselors, which can either be a person or a company that works with your lenders in negotiating lower interest rates and putting together all your debt payments into a single monthly payment. Debt management can slice your interest rates in half and gives you a path to paying off debts, covering your struggles for at least three to five years.

Believe it or not, there is debt that can be considered as good. Here is the difference between good debt and bad debt.

Good debt

When debt has the possibility of helping you generate income and improve your net worth, it can be considered good debt. Also, if it can help your and your family’s life in some significant ways, it is good. For several types of scenarios, debt may be beneficial to your financial health. For instance, in business. The money you borrow to start a business can be considered good debt. Despite many ventures failing, the debt would be worth it if your business takes off successfully.

Bad debt

This is the money you consider borrowing to purchase a depreciating asset. The debt would not be healthy for your finances if it carries a high-interest rate. Moreover, having too much debt can hurt your credit score. Using too much of a revolving line of credit, such as having your card maxed out, will make your credit score suffer. An excellent example of this is purchasing clothes and consumables. It is understood that you need clothes, food, furniture, and other things. But borrowing money using a high-interest credit card to buy them is not a good use of debt. If you thought about using a credit card for convenience, ensure that you will be able to pay off your balance to avoid interest charges.

On the other hand, not all debt can be categorized as good or bad. It usually depends on your financial situation and additional factors to classify debt as positive or negative. Certain types may be good debt for some but bad for others. Here are a couple of examples.

Borrowing for debt payment

Consumers already in debt take out a debt consolidation loan from banks or lenders that can be beneficial. These loans typically have lower interest rates than the majority of credit cards. They can help you pay off existing debts and save money for further interest payments. It is essential to remember that you should use the money to pay off debts instead of other spending.

Borrowing to invest

Having an account with a brokerage firm can gain you access to a margin account and allow you to borrow cash from the brokerage in purchasing securities. It is called buying on margin, which can help you make money if the security’s value goes up. Nonetheless, it can cost you money if the security loses its value. Therefore, this is not recommended for inexperienced investors who cannot afford to lose money.

Knowing whether a debt is good or bad depends on the individual’s financial situation, which also involves how much they can afford to lose. You can consider consulting a professional financial advisor to review your debt situation and management options.

Tips on how to manage your debt

Make a visual copy of how you owe

List down your debts, the total amount, how much you pay monthly, the interest rate, and the due date. For accuracy, you can refer to your credit report. Having a list in front of you can help you see the bigger picture and for your awareness. However, it does not end with just making the list. It would help if you periodically used it as a reference whenever you pay bills. Also, update your list every few months when the total amount of your debt changes.

Have an alert before the deadline

Being late for payments will make it more challenging to deal with debt since you have to pay a late fee for every miss. Missing two payments in a row would negatively affect your interest rate, and your finance charge will grow. Try using a calendaring system wherein you enter your payments and set an alert as a reminder to settle them a few days before their due date. Furthermore, do not wait until the next due date to send in your payments whenever you miss one since it could be reported to a credit bureau. Just send your payment as soon as you realize it was missed.

Rank your debts

Credit cards have higher interest rates than most debts. As a result, paying off credit card debt first is an ideal choice. Out of all of them, the one with the highest interest rate should be prioritized for repayment since it costs the most money. You can refer to the debt list you made in ranking your debts in the order you wish to pay them off. You can choose to go with the immense debt or choose the ones with the lowest balance first.

Use your emergency funds as a backup plan

If you do not have access to savings, you will go into debt to cover emergency expenses. However, having even just a small emergency fund can cover little expenses that pop up once in a while.

Know when you need help

If you find yourself in a situation wherein paying your debt and other monthly bills is a struggle, that is a sign that you must seek outside or professional help. You can get advice from a credit counseling agency. Also, there are other options for debt relief, such as debt consolidation, debt settlement, and bankruptcy. However, you need to weigh your options wisely since these come with disadvantages too.

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