Dealing with Debt is one of the most important life skills to have in modern society. Be it from getting a credit card to getting a loan to buy your dream house, chances are you will have debt. An Experian report found that at least 75% of all adults in the US carry debt from month to month.
However, while debt management is an essential skill, most of us were never taught how to deal with it. This is especially surprising considering that consumer debt in the US grew to $14.3 trillion in 2020, according to New York’s Federal Reserve.
It doesn’t matter if you are already proficient or not when it comes to dealing with debt. When it comes to dealing with debt, there can never be too many tips. In this article, we will provide you with 8 easy ways to start dealing with debt.
Why Should You Start Dealing With Debt Now?
There are few words that instill more fear than debt, especially when you are unable to pay it on time. For this reason, many people choose to ignore it instead of having to deal with it. With studies showing that most people wait at least a year before taking action, it is important to understand why you shouldn’t ignore it.
Dealing with debt on time is important for your financial future, as it will avoid your credit score from being impacted. A lower credit score will prevent you from getting lines of credit in the future, which might be a disaster depending on your plans.
However, the consequences of failing to deal with your debt can be worse. When you fail to pay your debt after 31 days, most times it will be sent to a collection agency. This agency will have its debt collectors contact you (even harassing you on some occasions) to try to get you to pay.
Once a debt collector is in charge of your debt, you can expect to receive calls, emails, and letters. In this instance, you will be able to negotiate with the debt collectors to have it disappear. However, chances are that you are unable to pay if you haven’t done so by then.
If the debt collector fails to contact you or reach an agreement, there can be other consequences. Depending on the type of debt, you could get your property repossessed, salary/bank accounts seized, or be sued.
Debt won’t go away just by ignoring it. It not only has the potential to get bigger, but it will also follow you around for the rest of your life. For this reason, you should avoid letting it get out of control… And if you failed to do so, start dealing with debt as soon as possible.
8 Ways to Deal With Debt
By looking at this article you have already taken the first step toward dealing with debt. It doesn’t matter if you are already behind or just avoiding it. By following these easy steps, you will be better at dealing with debt now and in the future.
The strategy you use to deal with debt will vary not only depending on the size of your debt but also how big it is. Dealing with debt is never free of effort but dealing with it on time will make it easier in the future.
Let’s look at some easy ways to start dealing with debt!
1. Know Where You Stand
Knowing your current financial status is essential to create a plan. To do this, you should make a list of all your debts. It is recommended for this list to contain creditor information, amount, installments (if any), interest rate, due date, current status, or any other relevant information.
A good way to gather all the information on your current debt is to use a credit report. Companies like MyFico will allow you to get information from 3 different credit bureaus. This will not only provide you with all the debt you have at this time but also insights into your credit history and score.
If you have already been contacted by a debt collector, looking at your credit report will also allow you to determine if that debt is valid. In such instances, you should be able to get rid of it by demonstrating you are not responsible for it.
2. Calculate Your Debt To Income Ratio
Once you have listed all your debt, the next step is comparing it with your income. This can be done by calculating the Debt-to-Income ratio (DTI). This is the percentage of your monthly income that should go to pay monthly debt payments.
Finding your DIT is as easy as dividing your monthly debt payments by your gross monthly income. By multiplying the result by 100, you will get the percentage you should allocate to debt payment. The lower the number is, the better you are doing in terms of debt.
Once you start dealing with debt, this number should ideally stay the same or get lower with time. As this metric is also considered by most financial institutions, having it under control is essential to access financial services.
3. Don’t Let Monthly Bills Expire
All bills are a form of debt. Allowing your monthly bills to expire will not only result in late fees but also add more financial stress the next month. Depending on the service or company you own money to, there might be other consequences.
While this tip might seem obvious, many people don’t plan a monthly bill payment calendar that ensures they pay on time. This results in an accumulation of late fees that could have been used to pay other debt.
4. Prioritize the Minimum Payment
A lot of times, it is just not possible to pay all of your bills at any given time. When this happens, you should prioritize making at least the minimum payment. While this will make no progress toward paying off your debt, it will protect your credit score and account standing.
5. Know What Debt to Prioritize
Just like prioritizing the minimum payment, you should also know what to pay first. It is usually recommended for you to pay the debt with the highest interest rate. This usually means you will be paying your credit cards first.
If you don’t have a credit card, look at the list you made and choose the debt with the highest interest rate. You should also try to prioritize those accounts that still have good standing, as it will be worth it more in the long term.
In some instances, it might be worth it for you to pay the debt with the lowest interest rate. This approach will be better if you have issues following through with plans or are dealing with multiple debt sources at the same time.
6. Be Prepared for Emergencies
Most people are one emergency away from falling behind when it comes to paying their debt. For this reason, it is recommended for you to have an emergency fund you can access to. Saving is also a way to start dealing with debt.
By saving a percentage of your salary each month, not only will you have a cushion in case you fall behind on your debt… You will also be protected from other circumstances that can negatively impact your finances.
7. Recognize When You Might Need Help
It is easy for our ego to get in the way of dealing with debt. However, when things get hard, looking for help can be the best option. If you notice you are at risk of being unable to pay your debt, you can always ask an expert for help.
Financial advisors have historically been seen as something reserved for the rich. However, this is no longer the case. Services like Blooom make it easy for you not only to get insights into your financial situation but also to get direct assistance.
By using Blooom, you can gain access to a financial advisor to help you evaluate your situation and formulate the best plan for you.
8. Always Be on Top of Your Debt
Being on top of your debt is the best way to ensure you won’t fall behind. One of the worst consequences of the digitalization of financial services is losing perspective.
Studies have shown that using debit and credit cards, as other ways of digital payments, makes people less conscious about how much they spend. This is also the case when you access credit.
Apps like CreditSesame help you monitor the status of your credit at any given time. Not only does it provide you with a free credit report and score, but it also gives you suggestions on how to improve it.
By using such apps or manually monitoring your credit regularly, you will get better at dealing with debt. In addition to this CreditSesame will also provide you information on current credit services you are using, suggesting better alternatives if there are any.