3 Steps To Managing Your Debt Better
Debt is a double-edged sword.
Borrowing smart and repaying strategically, will enable you to use debt positively and help you to generate positive returns and aide cash flow. Borrowing unwisely or too much, can get you into deep financial trouble with a long road to recovery.
Here are three steps to managing your debt better and keeping you on the right side of the track.
Step One - Calculate how much you can realistically pay off each month
Before you start, you will need to complete a budget to see what spare income you have each month.
By using FREEZE’s income and expenditure tool, you can calculate how much of your debt you can realistically pay off each month after your essential household expenses.
Step Two - Make a list of you “bad debt” and rank it
Not all debt is created equal and isn’t universally bad. In fact, some debt is actually good, useful, and worth having on your balance sheet. It just depends on what type of debt it is, and how you’re using it.
Another way of looking at is that Good debt puts money in your pocket. Bad debt takes money out of your pocket.
High interest credit card debts and unsecured personal loans are almost always bad. Same goes for car loans, where you’re paying interest on a depreciating asset. If you’re saddled with these kinds of high interest debt, rank them by their respective interest rate – not by their total balance.
For instance, if I had credit card debt of £15,000 with a 24% APR and a car loan of £9,000 with a 9% APR, you would want to pay off the credit card first, to reduce the amount of interest you will have to pay.
Step Three - Create a plan and stick to it!
Once you have ranked your debt, it’s now time to plan how you are going to get your worst debt to a balance of zero, before you even think about tackling any of your other debts.
By prioritising paying off the paying off of the balance of the highest interest debt, before moving on to the next highest and so on, you will speed up the process.
Though it is extremely important that you make sure you are making at least your minimum payments on your remaining cards to avoid facing late fees.
Alternatively, you could explore getting a personal loan that you can use to pay off all your bad debt at once. If you have four credit cards with total debt of £30,000 and an average APR of 18%, and you could get a personal loan of £30,000 with an APR of 11.5%, it makes sense to take the loan and pay off all the credit cards at once as you will have to pay less interest overall.