Budgeting is key to becoming financially healthy and resisting the urge to overspend. Calculating all income and expenses with a spreadsheet or a visual budgeting tool (like Mint), is a good way to keep tabs on incoming and outgoing money. It allows you to visually see where all of your money goes each month, so you can make adjustments and cut backs where you need to. It is also important to keep good records of bills, credit card statements, and receipts. Once a solid budget is setup, you can adjustment it as you see fit. This will allow you to enjoy the goods and services that you really need, while getting rid of the unessentials. Budgets can also help you decide if you need to focus on cutting spending, or find new ways to increase your income.
Use a Secured or Prepaid Credit Card to Stay Out of Debt
If you are someone that has difficulty with overspending on your credit cards, you may want to try an alternative to an unsecured card. One way that you can stop yourself from falling into the credit card debt trap, is to switch to a prepaid card or secured credit card with a low limit. A reloadable card (or prepaid debit card) is set up to allow for the convenience of credit card usage without the temptation to overspend.
With prepaid cards, you make a deposit and all payments are deducted from this balance. This allows you to spend as you like, but does not allow you to overdraw on your account. This is important, as many people have difficulty dealing with the temptation of a high credit limit. Some prepaid cards can be loaded with fees that include customer service charges, ATM charges, and monthly charges. Certain prepaid cards also carry very high fees, but many are reasonable. Make sure you understand how fees can be deducted from your account, before you make the initial deposit!
Secured credit cards can offer easy approval, and can be a good option for someone who needs a credit card, but has poor credit. There are unsecured credit card offers targetted specifically towards people with bad credit, but the interest rates can be “very undesirable”. A few years ago, a credit card was created with the highest interest rate ever seen, at 79.9% interest! This card was targeted specifically to people with sub-prime credit. In this case, a secured credit card would be an easy to obtain alternative and would eliminate the risk of racking up a snowballing debt at an insanely high interest rate.
Setting Aside Money to Pay Down High Interest Debt
With a proper budget in place, you can visually see how high interest debt (like credit card debt), affects your bottom line. It can allow you to create a “fund” to pay down this debt. Credit card debt is one of the most expensive types of debt at an average of 15% – 20%. For the best results, it makes sense to pay down the highest interest debt first. For example, if you have $5000 in car loan debt and $1000 in credit card debt, you should spend the money from this “fund” toward the high interest credit card debt (even though the amount is smaller). In the long run, paying down debt that is accumulating at 20% interest makes much more sense, when compared to pay off auto loan debt that grows at 10%. Credit card debt is one of the most expensive types of debt that exists. In comparison, interest on a home mortgage can range from 5%-8%.
Negotiate Outstanding Bills with Creditors
If you have bills that have gone to collections, it makes sense to negotiate and settle. Many times creditors will accept a reduced lump sum payment to clear a debt, instead of taking the risk that you will default on the total amount. It is possible to negotiate with creditors yourself, but you may be a fish out of water when it comes to negotiations. Creditors have a lot of experience dealing with debtors, so you may be at a disadvantage. You may want to consult with a non-profit credit counselor who can give you unbiased advice or even help you work out a re-payment program.
This article was contributed by GreatCreditScore.org. The site provides information about economic news, strategies to invest, and techniques to build or repair credit.