Best Strategies For Handling Debt
Economic studies indicate the average American owes over $90,000 in debt. Since most Americans owe substantial sums of money, it is important to know how to handle debt better.
To manage your debt more efficiently, you should list down the various loans you owe, such as student loans, credit card balances, auto loans, mortgages, etc. When that is done, you can pay down debt in one of the 3 following ways.
The Snowball Method
In this method, you pay the smallest debt balance first. For all other balances, you just have to make minimum payments. Once you pay the smallest balance in full, you pay the next smallest balance while making minimum payments for the remainder. A big advantage of this method is that clearing up even the smallest debt balance can give a major boost to your confidence and motivate you to pay the other remaining debt balances.
In the debt avalanche method of paying debt, you first pay off the debt balance that has the highest interest rate. For all other balances, you make minimum payments. A major benefit of this method is that it can help you save interest costs by keeping them down. You will have to pay less interest over time.
Under debt consolidation, all debts are combined into one account. Taking on any more debt is avoided until the consolidated debt amount is fully paid. You can possibly benefit from a lower interest rate. Another benefit is that you have to focus on just one balance instead of several different ones.
You can choose any one of the methods above that suits you best. However, for debt consolidation, you may have to qualify. However, the first step for all the above methods is the same. You first have to check how much you owe. So, make sure that you first list down different balances along with their interest rates. To make a list of all your debts, you can make use of your credit report.
Debt To Income Ratio
The debt-to-income ratio tells you how much of your income is going towards debt payments. You can calculate it by dividing the monthly debt payment with your income and multiplying by a hundred to get a percentage. For example, suppose your monthly income is $3,000 while your monthly debt payment is $600.
It means that your debt-to-income ratio stands at 20%. Or, in simple words, 20 percent of your income is going towards paying off your debt. When you are paying off debt, you will want to maintain a higher debt-to-income ratio to pay down debt more quickly.
The best strategies for handling debt can help you to pay back debt faster and enjoy financial freedom.