Increasing amounts of debt will always have a negative
impact on your credit score even if you are always punctual in your
credit card payments. Successful and financially free people know
how to take out debt, what types of debt to take out and how to manage
their debts. Financially free people can easily differentiate between
good debt and bad debt. Here's a tabular summary of good debt v/s
- Mortgage loan
- Business / Commercial Loan
- Real Estate Loan (Home Equity
Line of Credit
- School Student Loan
- Auto loan
- Credit card debt
- Store credit cards
- Gambling debt
Now our focus on this page is 4 smart ways to control
debt. The most basic step is to AVOID taking out any of the above
"Bad Debts." This can be hard for many
people, take auto loans for example. Most people do not have enough
cash on hand to fully purchase a car in cash, unless it is a $1000
car. Furthermore, most people carry Sears or Walmart credit cards,
so the "Store Credit cards" item cannot be deleted from
1) Take Out Debt at Lowest Interest Rates Possible
If your credit card company charges you an interest
rate in the 13% - 15% range, shop for other credit card companies
that offer lower interest rates. If you have been a loyal customer
to your credit card company for many years but have not seen a reduction
in the interest rates charged, try to negotiate a deal with them to
lower interest rates. Advise them that you have been a loyal customer
to them for many years, but what are you getting from this loyalty?
If they are not willing to lower the interest rate, advise them that
you are shopping for another credit card company with lower rates
and will be transferring your balance at any time soon. Credit card
companies want to have long term loyal customers, so if they hear
your statement about transferring your balance, they would be more
than willing to co-operate with your demands.
a better interest rate will be easier if you have good credit,
have been punctual with your credit card payments, do not have
any late payment history and have been with a credit card company
for a # of years.
If you do find another credit card with lower interest
rates, do not hesitate to conduct a credit card balance transfer.
Use our Credit Card Balance
Transfers Checklist to do this properly. Use these guidelines
to make sure you get a good credit card transfer deal:
- Is the new lower interest rate that you are getting just an
- What happens
when the introductory period is over? Does the interest rate
go up? How high does it go up?
- What are
the fees and charges you will pay when transferring your credit
- Make sure
you know the minimum payments on your new credit card, any
annual fees, the APR, finance charges, etc. learn more about
all these credit card terminologies, go to 12
Important Credit Card Terms or Terminology You Need to Know
2) Do NOT Rack up Debt
Do NOT use your credit card to buy that McDonald's
burger or that new Plasma TV. Follow this rule and you will be sure
to keep your debts in control:
Will Purchase Something on my Credit Card -> "ONLY IF"
-> I Have Enough Cash to Pay For It!
Build yourself an emergency savings cushion so that
incase of emergency, you do not have to charge your groceries to your
credit card, you can use the cash in your emergency savings fund to
pay for those groceries. Credit card companies are actually moving
to the phase when they will eliminate any grace period. Therefore,
if you make a purchase on 1st June of $200, you will start paying
interest on 2nd which is the next day. There will be no 30 day grace
3) Minimum Monthly Payments?
If you pay only the minimum monthly payments stated
on your credit card statement, you will NEVER be debt free. Those
minimum monthly charges are used to extract payments from your wallet
for a lifetime, because the credit card company always wants to keep
a customer who will keep paying interest after interest charges for
a long period of time. Making even $20 - $50 extra per month will
save you thousands of dollars over the long term. You should set yourself
a goal when you want to fully pay off your credit card debt. Use our
article on Do It Yourself Debt Reduction to help you reduce debt as well as the Debt
Payoff Calculator to set a date when you want to fully payoff
all your debts.
4) Always have a Budget
Create yourself a budget like the one below.
Write down all your monthly expenses including groceries, rent,
car insurance, utilities, student loan payments, etc. Whatever
money you have left over will be used to pay off your debt with
the highest APR.
Consider the following example. Peter has
an after-tax monthly take home pay of $2000. After paying off
all his expenses every month, Peter has $450 remaining to pay
off any debts owed. He should therefore allocate this $450 towards
paying off debt that has the highest Annual Percentage Rate
(APR). This is the fastest way to reduce your debt.
|After Tax Monthly
Take Home Pay:
|Student Loan Payments
|Remaining amount goes towards
paying off debt with highest APR
Continue this process every month until the
debt with the highest APR is fully paid off. Once it is fully
paid off, move on to the next debt that has the highest APR.