There are some people who never have any kind of debt. But unless you plan on paying in cash for a home someday, you might want to take the route of just learning how to manage your debt well now. Every time you take on debt and pay it off, most often by using a credit card and paying it off every month, you’re building a credit history. Here are some rules to follow:
- Don’t take on debt you don’t need
Debt can be tempting, especially when it seems like it can let you buy your dream home or a fancy car, or just finally add a pair of designer shoes to your collection. But the cardinal rule of debt is to not take it on if you don’t need to. If possible, consider downgrading to something more affordable or just doing without until you can save up for it.
- Know your financial situation
Before you even start thinking about taking on debt, you first want to be very familiar with all aspects of your finances. What is your annual income? Are you sure that your income will stay steady or grow? How much extra room do you have in your budget for debt repayment? What kind of cash or investments do you have available to you? How much debt do you already have? Can you afford to take on more? Knowing your numbers is key to making smart decisions.
- Do your research
When looking at an interest rate, you want one that is lower and most likely fixed—and will always remain the same. An adjustable interest rate can increase drastically and suddenly you can’t afford that loan anymore. Don’t ever take the first option offered. There’s almost always something better out there, whether from a more reputable source or with a lower interest rate. If you’re offered a credit card, keep looking to find a better interest rate or better perks. Even if it takes three hours of Googling the terms in your credit card agreement, or sitting with the loan officer at the bank, get to know all the terms and what they mean for you.
Once you do have debt, you want to treat it as a financial priority. Here’s how:
- Prioritize it
If you have debt, you shouldn’t be living lavishly. Every time you choose to go out to dinner instead of making a payment on your debt, you’re choosing to rack up more interest. So try to pay off your debt as soon as possible with payments much higher than the minimum required. If you’re wondering how to make more room for higher debt repayments, having a budget and sticking to it is key.
- Don’t neglect savings while trying to pay a debt
When you have debt hanging over your head, it can be tempting to shovel every last cent toward paying it off. But the second you get handed a big medical bill, you’ll wish you had kept some money in savings. Plus, if you have no emergency fund whatsoever, you’ll have to accrue more debt in order to pay for those emergencies–and adding more debt on top of already-existing debt could make you feel bad enough that you give up altogether. For that reason, you should work on building up your savings at the same time that you pay down your debt.
- Pay off credit cards first
If you have more than one type of debt, prioritize paying off credit cards first, since the interest grows on these balances every day. Next up is other debt, including car loans, personal loans or student loans–for these, you should prioritize the highest interest rates first.
This doesn’t mean stop paying for your other debts altogether! Keep making the minimum payments, but shuttle as much as you can toward your biggest debt priority, which will save you money on interest. It’s a great mental boost to sweep one type of debt off your plate so you can focus on the next.
- Keep Track
Make sure you always know how much you owe to what lender, and how much interest you are being charged. The best way to do this is to enter your credit cards, student loans, mortgages and other debt accounts in a notebook that will keep track of it all.
- Consolidate Where You Can
If you have more than one mortgage, several credit cards or more than one student loan, it helps to consolidate it all with one bank. That way you can more easily keep track and make payments. If you have several credit cards with debt, try rolling it all on to a low -interest rate credit card.
Debt doesn’t have to be a bad thing. If you follow these rules, it can help you reach life goals like buying a home, establishing a fulfilling career or just easily shopping online—without putting yourself through stress or hardship.