In modern society, debt is a way of life. Taking on debt is many times required for a lot of activities, including: starting a business, going to college or buying a house. However, people forget that with credit, the risk of falling into debt increases significantly. Regardless of this, credit can be an ally when utilized carefully, as it aids your credit score, and may offer miscellaneous benefits, such as rewards in the form of cash or air miles. Here are five tips that will help you use your credit cards and other lines of credit to your advantage, and offer you debt relief in the long run.
The first tip is quite obvious, but it is very easily forgotten. Too often, people decide to use their credit cards for making purchases that they don't really need. The best way to avoid this is by making a budget at the beginning of each month, in which you lay out all the costs you will encounter (and those you are likely to encounter), and compare them with your total earnings. If, after subtracting costs from earnings, you end up with a positive number, then you are good to go. If you end up with a negative number, then you need to reconsider your spending. Though making a budget may be time-consuming, it will make you more aware of your spending.
If you have more than one debt that you need to pay off, begin the process by deciding which debts should be paid off first. Many debt experts recommend starting with the ones that have the highest interest rates. In fact, it is better if you concentrate on paying one at a time, instead of spreading yourself out too thin. Then, after the highest-rate debt is paid, you can move on to the second highest-rate one, and so on.
Other experts take a different approach and encourage you to pay off the smallest debts first to get the ball rolling. Both tactics have benefits and drawbacks. Much of your approach will be determined by your specific situation - How much debt you have, what your interest rates look like, etc.
All payments you make must be made on time, and should never be skipped. This includes simple things like utility and phone bills, but it is also applicable to credit card payments, student loan payments and car loans. Remember that even if the minimum payment is all you are able to make, you should, nevertheless, make it every month. Not doing so will hurt you in a number of ways; including the fact that it will drag down your credit score.
Even if you are always able to make all your payments on time, going over 30% of the total spending limit available to you will decrease your credit score. Remember that this limit applies to all of your credit accounts collectively, not individually. The good thing about this is that it means you don't have to make individual calculations for each one of your credit limits.
You have the option of negotiating with your lender to settle your debt for less than the actual amount owed. However, you must be very careful about this option, because it might work against you if you do it incorrectly. Make sure that the lender agrees to writing 'paid in full' on your account after you've paid the debt. If the lender writes 'settled for less than the balance', your credit score will suffer. Working with a settlement company can help you make sure to get everything right. They also have years of experience with the various laws and have built relationships in the industry that can be very helpful for individuals looking to settle their debt.
Credit scores are closely intertwined with your financial situation. If you end up with a low score, then this will most probably result in higher interest rates, meaning that you will be obligated to pay more. By keeping your credit score high, you are doing yourself a financial favor and investing in a healthy financial future. However, if you're a substantial amount behind with your payments, a weakened credit score probably shouldn't be your first priority.