Debt and Credit Direction

Credit cards and loans can be a great way to bridge the gaps in your budget as long as you know you can pay it back. However, what happens when you find yourself in over your head? Between school loans, mortgages, and credit cards many people find themselves tens of thousands of dollars in debt.

If you are concerned about debt, here are some tips to help keep you from drowning in credit problems:

Get everything Out in the Open

Chances are, if you are struggling with debt, you are balancing multiple bills, credit cards, and loans. The first step in your road to recovery is to get a full accounting of your financial situation.

Credit Clinics

Skip credit clinics that offer an easy “get out of debt” solution for a few hundred dollars. The hard truth is that getting out of debt is not a simple process and anyone offering a quick solution is probably scamming people out of money.

Your 401k

Money saved in your 401k is tempting when you are facing a lot of debt. If you have money saved in a retirement fund, the best idea is to leave it alone. You will only regret draining it down the road.

Credit Card Companies Are a Business

A credit card company is a business just like any other. Do not be afraid to call them and ask about your options. Negotiating lower rates, informing them of upcoming money problems, and reducing late charges can really help reduce the bottom line on how much you owe.

Also, call a credit company if you feel that there are errors on your statement. Skimming over a $25 mistake can end up costing a lot more in the long run with interest and charges.

Cash-Only Lifestyle

Decide if a temporary “cash-only” lifestyle could work for you. Sometimes the temptation of plastic in your wallet is too much. Set aside some cash for your entire day or only take a certain amount when you go shopping to ensure you do not overspend.

Consolidation

Before you consolidate your debt onto one credit card, consider all of your options. Signing up for a card with a low “teaser” rate is great if you have a set plan to pay off the balance in a short amount of time. Nevertheless, charging money to a card while you have a low rate will only leave you with a huge balance when the rate ends.

Two Things to Avoid

Never sign up for a store credit card to get 10 percent off your purchase. Usually the discount is an incentive to cover an insanely high interest rate. Similarly, avoid payday loans at all costs. The interest rates on payday loans can greatly vary from 20 percent to 500 percent. Soldiers on active duty have payday loan rates capped at 36 percent, which is still outrageous.

Emergency Funds

Once you build back a disposable income, be sure to set aside an emergency fund for a rainy day. Emergency funds help you cope with life’s unexpected expenditures and help keep you from falling back into debt. There’s no perfect number for an emergency fund, since everyone has a different situation; however, whether you can afford $500 or $5,000, having an emergency fund in place still provides a buffer for bumps in the road.

Credit Checks

We all know that credit makes the world go round. Credit scores are increasingly important for everything from negotiating low interest rates to landing that perfect job. Make sure you know your credit score and fix any problems before you try to make any large purchases. Take advantage of your free annual credit check from sites like annualcreditreport.com.

The goal is not necessarily to live without credit, but to live within your means and use credit responsibly to establish integrity rather than massive amounts of debt.

Photo courtesy Images_of_Money