Updated: Oct 4, 2021
Nobody wants to have debt but the rising cost of living and reliance on credit can leave us with outstanding bills and unexpected debt. The good news is that there are many ways to manage debt, each offering its own set of pros and cons.
In this guide, we look at some of the most common debt management strategies you should consider for your financial situation. Remember, you don’t have to have bad credit or overwhelming debt to benefit from these tips. The purpose of our article is to present different ways you can manage and relieve your debt burden whether you’ve maxed out your credit card or trying to prevent a negative credit rating. Let’s start by understanding what it means to have debt and what you can do to improve your financial circumstances.
*Please note, we are not an authorized financial services provider. The information provided is offered for general debt and credit management. If you need debt-related advice based on your personal financial situation, it is best to speak to a credit provider.
What is Debt Management?
Debt is defined as the money that is loaned from one party to another with the purpose of satisfying a financial need. Once a borrower is authorized to receive the funds, they will be issued some form of interest and a period within which to settle the debt.
The most common types of debt include mortgages, car loans, personal loans, credit card bills, and accounts.
Good Debt vs Bad Debt
There is also a difference between good and bad debt...
Good debt consists of the effective use of funds to build on personal wealth. This includes a mortgage, student debt, or loan consolidation.
Bad debt includes purchases that lose value once secured. This includes a payday loan or vehicle loan.
Secured vs Unsecured Debts
An example of secured debt would be taking on a vehicle loan. If you cannot pay the debt, the lender has a type of collateral (the car) in which they can recover the outstanding finances.
Unsecured debt does not involve any type of collateral or asset should the borrower default on the loan. If you do not pay the balance owed, the provider can issue a lawsuit to collect the outstanding funds.
Now that we know a little bit more about debts, let’s start by looking at the different ways to relieve financial burdens and improve your credit rating.
1. Determine Exactly How Much Debt You Have and Compare It to Your Income and Expenses
To start managing your debt you need to know who you owe, how much, and the interest charged on those accounts. Some providers offer special rates and terms for repayment so find out whether you can get an improved interest rate on how much you owe. By looking at your income and your expenses, you can also calculate just how much you can dedicate every month to each debt. You may be surprised to find that you can afford to pay a little bit more to each account helping to relieve your debt that much faster. You can also get an idea of how to split your payments so that all debts are covered at amounts and rates that you can afford.
Nobody wants to sit and make a list of who they owe and how much, but understanding each repayment can help you move forward with a better financial plan.
2. Consolidated Personal Loan
Once you’re aware of your total debts including interest, you can decide whether or not you’d want to consolidate it with a consolidated loan. Debt consolidation is the process of using one personal loan to pay off different debts so that you only have a single payment to make every month rather than multiple payments.
Debt consolidation sounds like a great option but before you decide to tackle your money matters with a loan, consider both the pros and cons.
Consolidated loans offer the convenience of settling debt faster so you can avoid late payments or the risk of negative credit. You’ll also have one payment to make each month making it easier to stay on top of your outstanding expenses. Depending on the debt and your credit rating, consolidating debts could offer access to better interest rates.
On the downside, you still have debt you need to pay. Consolidated loans don’t erase or reduce debt, and if you can’t get a good interest rate (a negative credit rating might get in the way of positive interest), then this type of debt management strategy may not be the best course of action.
3. Look at What You Can Settle Quickly
If you have more than one debt, another option is to look at which account or bill you can settle faster. Getting one type of debt paid in full while making affordable or minimum payments to the remaining accounts can help you reduce your debt minimize the impact on your credit and reduce ongoing financial pressure. Managing 2 accounts is certainly better than 3, but don’t stop making payments to one bill to settle another.
4. Negotiate with Creditors
You could be paying too much interest on your accounts. This might sound odd because every service provider has its own rates and charges, but surprisingly, there are creditors who are willing to negotiate a better interest rate provided that you meet the monthly payment requirements. Don’t be afraid to call your creditor to discuss better interest on your accounts especially if you’ve been paying your bills on time.
5. The Best Way to Pay Off a Credit Card
Your credit card has a major influence on your credit rating and your financial history. We know that credits cards can be incredibly useful for purchases when you don’t have the cash or don’t want to pay for goods or services using cash, but it can also be easy to max. A maxed credit card means higher interest rates on the repayments and if it isn’t settled within a certain period, it could lower your credit score.
If we look at the average interest rate for credit cards, we see an annual percentage rate or APR of 18% for new cardholders and around 15% for existing account holders. The APR charges on a credit card work differently to annual interest rates. You don’t get charged interest per year on your card but rather daily, depending on your spending habits, and only if you have credit card debt on a monthly basis.
The big question is, how do you pay off a credit card so that it doesn’t affect your FICO score or your future financial interests?
The best way to avoid high interest rates on your credit card is to pay it in full by the end of every month. If you settle your bill by the end of the month (or the applicable billing cycle), you won’t be charged interest on your purchases.
It is always a good idea to understand just how your credit card works so you can avoid high interest and penalties. There are cards that issue a specific interest rate for everyday purchases and another type of card that charges interest on a cash advance. The best step you can take to manage your finances is to learn how your credit card works concerning repayments and interest. Then, determine how much interest is charged and how it is calculated. This can help you stay on top of your repayments and your financial history.
6. Pay What You Can Afford
We all want to resolve outstanding expenses quickly but it can’t work if we push so much cash into our debt that we’re left with nothing in our pockets or wallets by the end of the week or month. Think of how much you can afford to pay every month to settle the debt. If you have a high balance to settle, sticking to paying a little bit (the minimum requirement) every month, will go a long way to affordability and sound credit management.
7. Stay On Top of Interest Rates
You take out a credit card only to find that the card’s interest rate will be going up in the next 3 to 4 months, what do you do? Look for a better deal! There’s no need to stick with a lender who is going to charge exorbitant interest and increase it in only a few months. The best step is to compare the different prices/rates based on your current financial history and to benefit from a better rate on an account.
The Best Strategy for Paying Off Debt and Why It’s Important
The best strategy for settling debt is to create a financial plan, pay what you can afford, and stay on top of the interest you’re charged. Consider your most pressing debts and develop a strategy based on your income and your expenses for each week and month. Finding ways of managing your finances more effectively can protect you from lowering your credit rating.
Remember that debt can create many restrictions when it comes to your financial and long-term goals. It makes it impossible to get approved for a loan to buy a car, take on a mobile contract, or rent an apartment. If you were to apply for a mortgage or home loan, you’d either get presented with a higher interest or approval for a partial bond. For many, the reality is no mortgage approval until finances are improved.
Having to pay bills or work on a financial plan to settle debts can also prevent you from having the extra cash to do the things you enjoy. It makes it difficult to afford a holiday you’ve always wanted or to build financial savings so that you have a nest egg you can use one day.
We know how rising bills, negative credit, and bankruptcy can lead to frustration, stress, and many challenges in your life. That’s why considering debt management strategies can help you find a plan or approach that works for your needs and budget today, tomorrow, and for the future.