Access to loans and lines of credit helps us take steps toward achieving personal goals we couldn’t have reached otherwise. These major milestones are exciting and often life-changing, whether a first car, a higher education, or a forever home. Sometimes the debt we take on for these achievements is an investment in our futures and is a normal, manageable part of life – but sometimes, the debt we take on can weigh us down, seeming to have a life of its own.
The key is understanding the different types of debt and how it impacts you financially because there are both good and bad types of debt. Good debt is usually an investment that will increase in value or save money over time. This includes things like home loans and even student loans. Bad debt is for items that don’t increase in value, such as credit card debt. Payday loans are another kind of bad debt due to the predatory pricing of these kinds of loans.
Of course, even good debt can become bad if it isn’t managed well, such as if you cannot make payments on time.
Those who have built up a mountain of so-called bad debt can take strategic debt management steps to eliminate that debt and better manage good debt. Here’s how to manage debt.
Review your credit report.
Everyone is entitled to a free copy of their credit report annually from each of the three major credit reporting bureaus. Start the process of getting your free credit report at annualcreditreport.com. By reviewing your credit report, you can identify any errors, create a plan for addressing any red flags in your credit history, and better understand how to manage debt.
Trim spending.
Examine your monthly spending and put all expenses into “needs” and “wants.” Needs are items you cannot live without, such as housing, food, healthcare, insurance, etc. Wants are frequent purchases of new clothes, entertainment, restaurant meals, and luxury items or services. Shop pricing for all your spending, including wants and needs, and look for ways to cut back spending on your wants. Consider, for example, doing meal prep once weekly to make cooking easier, which can help you avoid frequent restaurant meals.
Target your debt.
Look at your various outstanding loans and revolving lines of credit, paying close attention to their balances and interest rates. Choose one to focus on eliminating. You can choose the one with the smallest balance or the one with the highest rate. Once that debt is paid off, move on to the next.
Increase your payments.
With the extra cash you’ve found from your first step, put this money toward paying off your debt. You will reduce overall pay by making more than the minimum payment because more of your money goes toward the loan’s principal balance and less toward interest. The higher your interest rate, the more difference this will make.
Try debt consolidation.
Another great way to pay down debt is to take all that bad debt and roll it into one lower-interest loan or credit card. Called “debt consolidation,” this strategy can simplify paying your debt off over time by giving you one low monthly payment.
Negotiate with lenders.
Know that most creditors are willing to work with you for those struggling to make payments. After all, they would rather get smaller payments than no payments at all. Call your creditors to see if they will provide debt relief or debt management services or negotiate terms and payments to help you get back on track with your debt. For example, at Magnolia, we can work with you to help you avoid collections.
Get help.
Sometimes a team approach to debt management or debt relief is just what you need. At Magnolia, you can access free financial counseling for assistance with various financial goals, including debt management. You can also find assistance from organizations like American Consumer Credit Counseling, which works to help you take control of your debt.
At Magnolia, we’re happy to help our members get out of and better manage their debt. For debt management guidance, assistance with solutions, or debt consolidation, call us at (800) 997-7919. We can sit down with you to help you create a plan to become debt free.