Debt can be a major drag. Here’s how to approach yours.
- A new survey reveals that consumer debt is a problem for many Americans.
- Here are some tips for tackling your debt and paying it off more effectively.
Americans, in general, are no strangers to consumer debt. But that doesn’t mean they aren’t stressed about it. In a recent New York Life poll, 29% of Americans who feel less confident in their finances than before are facing debt management issues. If that sounds like you, here are three essential things to do.
1. Recognize the difference between healthy debt and bad debt
You may have a mix of debts in your name, and it’s important to know which ones you should try to eliminate first. Mortgage debt is considered a healthy type to have. A mortgage loan allows you to eventually own a house, and that house could gain or retain its value over time.
A car loan is also a fairly healthy type of debt. Although cars generally do not increase in value over time, they are an essential asset and they are worth money even as it gets older. Also, car loans, like mortgages, tend to come with fixed monthly payments.
Credit card debt, on the other hand, is usually bad news. Not only do credit cards charge a lot of interest, they often charge variable interest, making it difficult to predict your true cost of ownership.
The expenses you charge to a credit card may be just that – expenses, as opposed to assets that are worth a significant amount of money. You don’t necessarily have to worry about paying off your mortgage or car loan as quickly as possible, but you should aim to knock out your credit card balances as soon as you can.
2. Rework your spending to free up money for unhealthy debt
If you want to pay off your credit cards sooner, cutting back on non-essential spending should help free up some cash that you can use to pay down your balances. Take a look at your budget, or create one if you don’t already have one, and see how much you can save by reducing your spending in categories like entertainment and restaurants. You may even be able to reduce your spending on essentials like groceries and household products if you start looking for sales and shopping more effectively.
3. Consolidate your credit card balances to pay them off at a lower cost
If you owe money on different credit cards, consolidating your debt could make it easier to track and manage. It could also make it cheaper to repay.
One option to consider is a balance transfer, where you transfer your existing credit card balances to a single card with a lower interest rate (or, better yet, to a card with an introductory period where you don’t pay no interest). If you can’t qualify for a balance transfer or don’t want to get one, a personal loan is another option for consolidating your debt. The interest rate you are charged on one of these loans will likely be much lower than what your credit cards charge.
If you own a home and have high net worth (which may be the case today since home values are rising nationally), you may also want to consider doing a cash refinance. This option allows you to borrow more than the remaining balance of your mortgage and use the money you receive for whatever purpose you choose.
Debt-related struggles can impact your well-being and make you feel bad about your finances. If this is the situation you find yourself in, follow these three steps to get your debt under control and get rid of the unhealthy part of it as quickly as possible.
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