Everyone will incur some type of debt at some point in their lives. It is almost impossible to avoid. Having debt is not necessarily a bad thing, it is how Debt repayment is handled that makes the difference. There are ways for people to repay loans and credit card debt that will benefit them better than other methods. Unfortunately, a large percentage of people are paying back their debt incorrectly.
Treating Debt Equally
Paying off every bill on its due date and never paying extra is a mistake. Even small amounts paid towards each debt will help it to be paid in full faster, and save on interest. Making these extra payments should be the habit, not the exception, but there are more beneficial methods of this too.
People should always pay the most towards the debt with the highest interest, even if it has the lowest balance. The longer it takes to pay off a high-interest debt, the more money people waste. Once this debt is gone, put all of that payment into the next debt with the highest interest. Repeat until debt-free.
Saving While Borrowing
Obviously, people should have an emergency fund for themselves at all times. The problem happens when someone is putting money into an account that is paying them less interest than what they are paying on a loan. The only time saving makes sense is when interest rates on that savings exceeds all short term loans. Home loans are always the exception because it would be foolhardy to wait 15-20 years to begin saving for retirement.
Not Considering Deductions
Some debt is tax deductible, some is not. Knowing the difference and paying off the non-deductible expenses first is important. Of course, if the interest on the debt is high enough to make the deduction no longer beneficial, it makes sense to pay of this debt first.
Using Credit Incorrectly
Debt repayment using borrowed money can save money in some circumstances. Combining higher interest debts into one, lower-interest loan, will save money. Unfortunately, too many people use credit cards and other lines of credit to make debt payments.
The high interest rates on these types of products only put people further into debt, and less likely to have the cash to pay their bills next month. Always have an emergency savings account to prevent these mistakes.
Carelessly Missing Payments
Letting the car payment be late to buy Christmas presents, ignoring a small bill and paying double the next month or not having a budget established and missing a credit card payment are all common mistakes. All of these actions add fees and interest to debt amounts, without providing any benefit to the borrower.
Take charge of finances and avoid this type of avoidable mistake.
Debt can help people to build a good credit reputation or it can make life difficult. How it is handled is what will decide the path people take. Bad credit can eliminate many options people have available. Anyone having trouble with their debts should seek professional advice from a credit counselor or money manager immediately.