Debt payments is not a sexy topic and some people even go to great lengths to dodge the topic especially if they have to discuss it with loved ones. Finances is such a sensitive topic but choosing to sidestep the issues that surrounds your money management can lead to disaster and more importantly, debt in the household.
Businessinsider.com shared in a recent report that when you take a look at how consumers take on debt starting from 1989, that year when the Galileo Spacecraft was launched by NASA, another important item also kept increasing – household debt. It has increased sixfold from then up until 2013 from $888 to $5,700 mainly due to mortgage and student loans.
Some people might argue that the increase comes with an improving economy especially so that the country is ran by a consumer-driven economy. This means that the more the consumers “consume” or buy products, the economy improves. This might be a great way to justify those binge shopping nights you have after work. But this is just beyond shopping to help the economy.
You need to understand that there is nothing wrong with buying things you want especially those that you need. But what most people fail to realize is that as they use the economy’s need for its people to purchase as an excuse to go shopping, the manner by which they pay for those purchases are what brings them closer to debt.
You need to make sure that what you are buying is something that you need because if you keep buying useless items, the time will come you need to let go of those that you need just to make some extra money. You might not see the signs that you are already headed for debt because you are too consumed with your purchases
How to approach paying down debt
If you are already in the red and are looking for ways to make debt payments, here are a few ideas you might want to consider to help you reach your goal.
- Have a payment plan. Once you are decided that you want to lower down your debt by making aggressive payments on it, you need to act on that plan. There are a few repayment options you can tread and the two most popular are snowball and avalanche methods. Snowball is paying down the account that carries the smallest balance first. This gives you a moral boost and leaves you with an extra money you can use to pay down the next smallest balance. Avalanche on the other hand tackles the account with the highest interest rate first. The benefits of this is that you get to save a few more on interest payment once you are done in paying your debt.
- Think of debt payment as a diet plan. If you have been on any kind of diet or know people who went through or are going through one, you would know the value of sticking to the meal plan to make the diet a success. The same with your debt payments because you need to stick to your plan to make it work. Another concept that you can learn when you correlate dieting and debt payment is that you are never really done. When you have reached your desired weight in dieting, it doesn’t mean that you can eat again whatever you want. You need to watch what you eat and the same goes with your finances. Successfully paying off your debts is not a license to spend carelessly again. You need to start paying more attention to your purchases to steer clear of the same mistakes you did in the past.
- Never miss a single payment. There is never really a reason to miss a payment unless you are jobless and no reserve funds to speak of. But even then, you can talk to lenders and tell them your current situation. Investopedia.com explains that delinquency and default are two different things where the former is just missing a few days or months of payment and the latter is completely non-payment of loan. Either of these two puts an adverse effect on your credit score and lowers your chances of low rates or favorable requests from your lender. Look at debt consolidation if you are having problems tracking all your payments so you only look at one payment account.
- Look at student loan repayment plans. Student loan, apart from mortgage loan is driving up the debt problems of consumers. It is a totally different discussion if student loans are good types of debt but repayment of these loans is such a hard task for graduates especially those that are still earning anywhere within minimum wage. What you can do is to look at repayment options for federal student loans to make the payments go down or check if refinancing with a private lender will benefit you. The idea is to look for way to make the payments manageable.
- Check if refinancing is an option. When you are tackling debt payments, you do not have to get stucked with high amounts. There are ways to lower down those payments and one is debt consolidation to take advantage of lower interest rates. But you need to understand that this is possible of you have a better credit score at present compared to when you took out the loan. Another one is using your house’s equity to lower down rates for debts with high interest rates. But you need to seriously study this one first and make sure that you are not putting your house in jeopardy.
Common financial mistakes that leads to debt
If you are wondering how you ended up with a mountain of debt payments in your finances, here are some of the most common mistakes people make.
- Absence of a budget. Your household budget is one of the most important pillars of your finances. If you do not have one, it would be next to impossible to manage your income and expenses. Put together a simple budget and improve on it as you go along. The important thing you need to remember when you are starting to put a budget together is to include all your sources of income and all expenses.
- Borrowing left and right. You might have a weakness for that red “sale” sign on the window displays of your favorite shops and you instantly pull out your credit cards to buy clothes or shoes or other items. One thing you have going for you is knowing what your financial weaknesses are that you can work on addressing those concerns. If you know that there is a sale on a particular shop, try to avoid passing thru it altogether. You can also leave your card at home to prevent you from charging on your credit whenever you want.
- Cosigning loans for friends and family. USNews.com stresses the fact that consumers should carefully think about cosigning loans for friends and family. They are not all bad but you need to carefully asses the repayment capability of the person you are cosigning for. If they get to pay the debt, then everything is okay and it even helps your credit score in a way. But if they fail to meet their financial obligations, then there payment obligations become your obligation and whatever damage it brings to a credit score affects yours as well.
Unless you win the lottery, there is no easy way around debt payments. The best thing you can do is to make sure that you get to know and use several repayment concepts and knowledge that can help you become debt-free.