Effective Debt Management Techniques

Debt is a highly misconstrued concept. Most people would balk at the idea of incurring debt as they are scared of going to the poor house, like many others. But debt, like credit cards, is a mere financial tool to aid you in reaching your financial goals within the quickest time possible. Debt can work to your advantage as long as you are able to handle it effectively. So before you start panicking, here are effective ways on how you can manage your debts properly. That way you can make them work for you

Prioritize your debts

Ideally all debts are to be settled on or before the actual due date. However in reality, this is not always the case. It is not always possible to do this as there will be some months when cash flow will be tight, causing some delays in payment. So when this happens, make sure that you pay off the “more important” debts. As a rule of thumb, it is always best to knock off the debt with the highest interest rate. That way you would not incur too much penalties. But it is also good to look at the situation and analyze each debt. Remember, that your goal for paying your debts is to make your financial goals possible, rather than create a sinking ship for yourself.

Understand how your debts work

The main key to being able to manage your debts wisely is being able to tell which debts would be good to upkeep and which ones will just place you in a worse financial situation. One example would be if you have to pay some student loans at 5% interest and a home equity line of credit at 4%. The conventional wisdom for this situation would be to pay off the student loan first as interest rate is higher. But if you would really understand the way student loans work, you can actually request for a temporary suspension of payments or a forbearance. This will allow you to skip payment dates without having to be impounded interest on. However this will only apply if you are unemployed or if you do not have a steady flow of income. So should this apply to you, you can actually settle the home equity line first. That way there will be available credit, should you need some in case of any emergency. In a nutshell, you need to how much debt you have and how much can you afford to have. That way you can make advance payments and discern when to pay the minimum.

Do not limit your financial flexibility

Loans and credit cards are useful tools that can help you during emergencies. However if you are not able to look after these tools well, there is the tendency for them to backfire and cause bigger problems for you in the long run. A lot of people like to consolidate loans or credit card balances in order to get the best interest rate, saving up in the long run. This can be a good idea. However you need to assess your financial situation. Because the moment you meet a financial roadblock, this consolidation can backfire as all payables are lumped into one. You would not have any flexibility with regard to payment date and terms of payment, as compared to if you did not consolidate your loans or credit card balances, you can slowly pay them based on the different due dates.

Make full use of your credit card

Credit cards are helpful for building up credit ratings, apart from being able to help you with your cash flow during tight months. But because of mismanagement, many people have been burned by credit cards and have just opted to pay off their debts and cut the card altogether. This is not a wise decision as credit cards can serve as a safety net during financial setbacks, such as job loss or during emergencies. Moreover once cutting off your credit card, this will be reflected on your credit score and you will be rated negatively, thus lowering the chances of you getting a loan approved in the future. Always remember that credit cards can be a big help. Just always remember to pay all your bills on time to avoid any problems.

Debt can work to your advantage if you only know how to manage it well. In fact, this can be a big asset to you in reaching financial security. Effective management is the only key.

Photo Attribution:

Featured and1st image by Stuart Miles / FreeDigitalPhotos.net (http://www.freedigitalphotos.net/images/bills-calculated-means-invoices-payable-and-owing-photo-p266425)

2nd image by renjith Krishnan / FreeDigitalPhotos.net

3rd image by Stuart Miles / FreeDigitalPhotos.net