More and more news stories these days feature individuals and families in the midst of debt nightmares. Unfortunately, thousands of Americans every day are experiencing serious financial problems because of debt. If you want to avoid these debt nightmares, here are ten things to think about:
1. Keep Your Health Insurance Whenever Possible
It’s not always possible to keep good health insurance, but when given the option for a lower-paying job with decent coverage and a higher-paying job without medical insurance, opt for the insurance every time. According to The American Journal of Medicine, medical bills cause over 60% of personal bankruptcies in America! With decent insurance, you can keep your medical bills from getting completely overwhelming.
2. Limit Your Credit Card Spending
This is kind of a no-brainer when it comes to keeping clear of your own personal debt nightmare. Credit cards can be good tools, but they can also be an easy way to continually live beyond your means. Limit your credit card accounts to one or two, and only use credit cards for specific purchases, preferably ones you can pay off by the end of every month. If you must use a credit card to finance a major purchase – like a new washer and dryer or furniture – be sure you can pay down the total in a reasonable amount of time.
3. Make More Than Minimum Payments
Another way to roll yourself right into a debt nightmare is to make only the minimum payments on your credit cards. If you charge $1,000 to a card with a decent 15% interest rate and pay the minimum of $22.50 per month, your original purchase will end up costing over $1,700 (almost double!), and it will take 106 months to pay off the debt. Put just $50 a month toward the debt, and you’ll only pay $1,160 total and will have the debt paid off in 24 months. Who can’t come up with an extra $28 a month for those kinds of savings?
4. Live on Cash When You Can
It’s not always practical to live completely on cash, but a cash budget has been proven to rein in spending for most consumers. Consider taking out cash for groceries, eating out, and fast food at the beginning of each month. When the cash runs out, you stop spending. See how much that helps you get your budget – and your debt! – under control.
5. Watch Your Vehicle Spending
If at all possible, you should never finance a car for more than two years, and the total of all your vehicle costs should be under 10% of your total gross income for the year. It can be tricky to keep costs this low, but buying used, getting a good deal on interest rates, and keeping your car well maintained can all help you keep this debt down.
6. Use The 36% Rule
Many mortgage companies use this rule to determine how much you can afford in monthly house payments. In general, it’s a good idea to keep your total monthly debt payments at or below about 36% of your income. If you rent a house, count your rent towards this, as well. Obviously, the more credit card debt you have, the less room you have for other expenses – like student loan payments and car payments!
7. Cut Back on Education Costs
According to FinAid.org, the average student loan debt among graduating seniors in 2007-2008 was about $23,000, which didn’t include private loans that many students end up taking out. Student loan debt seems like a good idea at the time because an education is so worthwhile, but if you can cut back on your debt, you should. Graduating and having a starting-wage job with high student loan payments is one way many young people end up rolling in credit card debt, since they have to use credit cards to keep up with their basic living expenses. Go to a cheaper school. Sit out a year and save up some money, or live at home instead of in campus dorms if possible.
8. Stay On Time
Sierra Dawson from CreditDonkey says, “One of the best ways to turn minor debt into a nightmare is to get behind on your payments.” Credit card companies and other lenders will often slap you fees for being late, and those fees are then rolled into your monthly payments. The later you are, the harder it becomes to catch up on your payments! Keep a schedule of due dates so that you always pay bills on time, even if it means skipping a meal out with your friends that weekend!
9. Keep Your Credit Score High
One great way to get better deals on loans and to thus save money is to keep your credit score high. Do this by making payments on time, keeping your debt to credit ratio low – especially on revolving debt like credit cards – and only taking out new loans when you genuinely need to. A higher credit score makes it easier to get low-interest loans in the future, so you can save money down the road by being proactive about your score now.
10. Get Help Before You’re In A Debt Nightmare
Between 2 and 2.5 million Americans seek the help of a credit counselor each year because they’re on the verge of bankruptcy. Why wait that long, though? If you’re starting to struggle with your debt and aren’t sure where to turn, look into free local programs for credit counseling. Often, these counselors can help you take practical steps to get your spending and debt under control so you can regain some control over your life and your spending.
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