Being in debt is incredibly common these days. I have debt, my friends have debt, and you probably have debt too! It’s a side effect of the ‘American Dream’, and it’s easy for it to slip from well-managed to out of control.
When you decide enough is enough, take the reins to control your debt.
How in the world can you do that? Here’s what you need to know.
Layers of Debt
First of all, you need to understand the kind of debt you have in order to understand how to pay it back. For starters, there is secured debt, which can be taken away if the loan isn’t paid. Secured debt includes home loans, car loans, or anything else you are making payments on. There is also unsecured debt, which is a loan you receive without anything that can be taken – such as credit cards or student loans.
There are also different ways to manage debt. One way is through installments over a fixed time period, such as a 30-year mortgage. Another avenue is revolving debt with no end in sight. You simply have a credit line you can use.
Now that you know the basics, let’s look at how they impact your credit.
Good Debt and Bad Debt
Each type of debt affects your credit score differently. Some debt, believe it or not, can actually boost your credit score! It is possible for you to owe thousands of dollars in credit card debt, hundreds of thousands of dollars in student loans, and have a mortgage – yet still be in good standing with a good credit score. How is this possible? It’s all about the ratios.
Numbers are the key to understanding your debt. Creditors will look at your available credit—possibly your credit card limit—and compare that to the number of your actual debt. The goal is to have your debt ratio below 30% along with a good payment history. If you can reach this magic number, you have proven yourself to be a responsible borrower (though you may be a hungry borrower!).
Consolidation and Negotiation
Sometimes debt can be too much to handle. If you have reached your last resort, you are probably considering consolidation. Credit repair companies offer to help by making agreements with creditors to pay off debt at a reduced amount. They will then put it into a single debt you pay over time.
Sounds good, right? It’s unfortunately not all positive. The benefit is that it often lowers the overall amount you’re paying each month. However, your credit score takes a pretty hard hit.
Other than consolidation, the best option is tackling the debt yourself. You can call your bank or creditor to negotiate, which is helpful in reducing monthly payments. Be careful, however, because banks and creditors can add huge interest rates or fees – making the situation worse! Choose wisely before agreeing to anything.
Banks and lenders want to know you will pay them back. If you can build history that proves you will continue paying your debts, you are on the right track. Tackle the debts you can, move your numbers to that magical 30%, and talk openly with creditors. If you need help or advice, contact us right away. We are happy to walk you through it!