Introduction
Credit is useful when used properly, which means that you can use it to make big purchases, pay for education, or for emergencies. But if not well controlled, debt can turn into a nightmare and become a source of stress. It is important to learn how to handle debt in a proper way so that there would be no financial issues in the future.
At Middlesex Healthcare Federal Credit Union, we have the responsibility of ensuring that our members make the right financial decisions. So in this article, we’ll take a look at some of the things that you can do to avoid these pitfalls and work towards becoming debt free.
1. Understand Your Debt
The first step to managing your debt is to know your debt and this involves knowing what you owe. It is important that you start by making a list of all the credit facilities you have, credit cards, personal loans, auto loans, mortgages among others. For each debt, note the following key information:
- Total Balance: What is the balance on each debt?
- Interest Rate: What is the interest rate for each debt? Higher rates normally imply that the debt is costly to support.
- Minimum Payment: What is the least you are required to spend every month?
- Due Dates: When is your payment schedule each month?
Arranging all this information in one place allows you to see what you owe and how you can go about paying it off.
2. Create a Debt Repayment Plan
After evaluating your debt, the next thing that you need to do is to come up with a repayment plan that you can afford. There are several strategies you can use, depending on your financial situation and goals:
- The Snowball Method
The snowball method is where you pay off the smallest debts while paying the interest on the larger debts. This approach gives you quick wins, as you will notice that debts will be paid off faster. Once a small debt is paid off, you apply that payment amount to the next smallest debt, creating a “snowball” effect.
- The Avalanche Method
The avalanche method focuses on paying off your highest-interest debts first. By tackling the most expensive debt, you save more money in the long run. Like the snowball method, once a debt is paid off, you apply the payment to the next debt.
- Debt Consolidation
If you have multiple debts with high interest rates, debt consolidation might be a good option. This involves combining all your debts into a single loan, usually at a lower interest rate. At Middlesex Healthcare FCU, we offer personal loans that can help you consolidate debt and simplify your payments.
3. Avoid Taking on More Debt
One of the most common mistakes borrowers make is taking on new debt while trying to pay off existing debt. To avoid this, try the following strategies:
- Use cash or debit for Everyday Purchases
Credit card debt can be avoided by paying with cash or using a debit card instead of a credit card. You will be discouraged from spending a lot of money when you are spending money that you deposited in the bank.
- Build an Emergency Fund
Emergencies are one of the main causes of people’s use of credit cards or loans, and it is not a secret. If you have built an emergency fund, you can use it to pay these expenses without having to borrow. It is recommended to try to have at least three to six months’ worth of living expenses in an emergency fund.
- Do not make large purchases when it is not necessary.
This is why it is unwise to take out a loan to buy a new car or to take out a loan for a vacation if you already have outstanding debt. The first thing to do is to concentrate on reducing the current balance that you have.
- Monitor Your Credit Regularly
Credit score is an important factor in your financial life and especially when dealing with debt. Credit score works in a way that a good credit score leads to low interest rates and good loan terms. It also helps you to keep track of your progress of repaying your debts and if you are not missing on any payments or are taking more debts.
At Middlesex Healthcare FCU, we recommend that members perform a credit check at least once a year. You can receive a free credit report once a year from each of the three major credit reporting agencies. It also helps you correct errors that may be pulling down your score and which you may not have noticed when you were not monitoring your credit.
Bottom Line
Debt is not a bad thing but managing it responsibly is very important for financial stability and for being stress-free. You can get on top of your finances by knowing your debt, making a repayment plan, being disciplined on your spending and avoiding borrowing unnecessarily. Middlesex Healthcare FCU is here to assist you with loan rates that will not break the bank, as well as guidance, and tools to assist you in the process.
If you’re ready to take charge of your debt and move toward a more secure financial future, contact Middlesex Healthcare FCU today to explore your options and get started.
