10 Steps to Manage Your Debt

10 STEPS TO MANAGE YOUR DEBT Created by Hannah Russell

1. MAKE A LIST OF ALL YOUR DEBTS -- AND THE DETAILS • Knowing exactly what you owe, and who you owe it to, helps ensure you never miss payments. It also allows you to develop the most effective debt repayment strategy since you'll have a big-picture view of your finances.

2. DETERMINE WHAT YOUR DEBT IS COSTING YOU • It's important not just to know how much you owe but to understand how much your debt costs. When you borrow money, you pay interest. The higher the interest rate, the more money it takes to repay your loan. A longer repayment term also means you'll pay back more money in the end, although monthly payments will be smaller.

3. MAKE MINIMUM PAYMENTS ON TIME EVERY MONTH • If you don't pay the minimum, your creditor could charge a late fee. If you're 30 days or more late, creditors typically report your late payment to the credit bureaus. This damages your credit score. You could also go into default, triggering a lawsuit, repossession of your car, or home foreclosure.

4. GET HELP IF YOU STRUGGLE TO MAKE PAYMENTS • Mortgage lenders, car loan lenders, and credit card lenders may be willing to work out a payment plan if payments become unaffordable. Call the lender and tell them you can't pay and see if they're willing to work with you. If you're offered a modification to loan terms, get the details in writing.

5. THINK ABOUT THE ROLE YOU WANT DEBT TO PLAY IN YOUR LIFE • Many people don't want to be in debt forever and want to repay debt quickly. This is usually a smart approach for costly consumer debt, such as credit card debt. It's not necessarily the right approach for low interest debt -- such as mortgages -- since interest rates on the debt may be lower than rates you could earn by investing.

6. UNDERSTAND THE IMPACT OF DEBT ON YOUR CREDIT SCORE • Your debt affects more than just the interest you pay. Your credit score can be affected, too -- and a low credit score means you may not be approved for loans in the future or you'll have to pay more to borrow at a higher interest rate.

7. DETERMINE YOUR DEBT-TO- INCOME RATIO • Knowing your debt-to-income ratio will help you determine if your debt could disqualify you from borrowing money in the future. For example, if you want to apply for a mortgage, you usually won't qualify if your debt-to-income ratio is above 43%. If monthly debt payments total $2,000 and your income is $3,500, you'd likely be denied a mortgage.

8. CONSIDER STEPS THAT COULD CUT YOUR INTEREST RATE • Personal loans often have lower rates than credit cards. You could borrow from a bank, credit union, or other personal loan lender and use the money to pay off one or more credit cards. This would also allow you to have one monthly payment instead of many.

9. CHOOSE A DEBT REPAYMENT STRATEGY • This approach involves paying off your smallest debt first, then moving onto your next-smallest debt. The snowball method has been found by researchers to be a better approach to debt repayment because it helps many borrowers maintain their motivation.

10. BALANCE DEBT REPAYMENT WITH SAVINGS GOALS • If you don't have an emergency fund, you may have to put unexpected expenses on a credit card. If you were working on paying the card off, putting new charges on it could be discouraging enough to cause you to stop trying to manage debt.

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