When the word "debt" is mentioned, it is sometimes thought of as a negative thing. Yet, without the ability to take on debt, millions of people around the world would not be able to own a house, purchase a car or pay for important items that are just out of their budget. When debt is used responsibly, it's a valuable tool that allows individuals to take advantage of opportunities that they would've otherwise missed. While debt does increase financial burden, a person should not totally rule out this option when they want to make a purchase. Here's 4 rules that can be followed to ensure that people increase the amount of debt that they have in a responsible manner.
Make Wise Choices
When thinking about taking on new debt, a person should analyze all of their options. This applies to all types of debt such as mortgages, credit cards, student loans or purchasing an auto. It's always best to analyze the terms of each offer and compare interest rates. Also, any extra incentives like prepayment possibilities should be factored into the decision making process. Some main numbers to analyze include the monthly cost of the debt and the period of time that it will take to fully pay the debt back. A person should know how much money they will be paying in interest and the actual amount of money that they will borrow. Calculators are available on the internet that give these figures. Here's an example of a mortgage calculator that can be used when a person is thinking about buying a new home.
Have A Routine For Payments
Once a person establishes some type of debt, it's important that they pay on time so that they will avoid any fees or penalties. Also, paying on time ensures that they keep a credit profile that is worthy of handling debt. When people fail to pay the required amounts owed on their credit cards or other financial obligations, this will get marked on their credit reports. It will also lower their credit score and make it more difficult to obtain more debt in the future -- they may be able to borrow money, but the terms will probably include higher interest rates. This can be avoided by staggering the dates when different types of debts require payments. A person should make sure that they have enough cash flow available to pay each debt when they receive notification that a payment is due.
Keep A Tracking System
It's imperative that individuals who take on debt know where they stand each month with each type of outstanding debt. This can be done by having a system that tracks each financial obligation. A popular way to do this is by using a budgeting app like mint. This handy financial tool can easily assist with budget creation, bill payments and even has the capability to find out the credit score of an individual when they utilize this software. Accounts, bills and credit cards can be linked so that the information from each separate entity can be easily tracked. It's completely free to get set up and start.
This rule mainly applies to using a credit card as they are so convenient to use. Unfortunately, it's way too easy for some people to overspend and start accumulating more debt than they can afford each month. If a credit card is used like a debit card each time that a purchase is made, an individual will know that they have enough money in their bank account to pay off each purchase at the end of the month. Paying off the entire balance is a good habit to get into when a credit card is used. It ensures that extra debt is not being accumulated and extra interest that could be used for essential items is not being paid to a credit card company. Credit counseling services are available for individuals who need some extra help organizing their money. These services can help with budget planning and other money management techniques.
Following these four rules is one of the best ways that people can make sure that they use debt responsibly and don't get into financial trouble.