If you’re like many Americans, you’re probably having at least some financial trouble that’s being caused by debt. With the average American household holding are $7,149 in credit card debt alone according to statistics released by the Fed in July 2015, it’s not surprising that so many families are struggling under the burden of too much debt for a budget to handle.
This puts households at risk for weaker credit, less available cash flow, and possibly even bankruptcy. To avoid these situations, you need to eliminate debt and ensure it stays at a minimum to improve your financial stability as much as possible.
These five steps can help you get on the right financial path when it comes to debt:
- Maintain a credit card debt balance of no more than 10% of your monthly net (take-home) income. This amount almost always ensures that your total debt burden doesn’t exceed what you can afford at your income level. If your debt payments exceed 10% of your monthly income, you need to take aggressive action to implement a debt reduction strategy in your budget.
- Never be satisfied paying only the minimum amount due on your credit cards. The minimum payment schedule on your credit cards is designed to keep you in debt as long as possible to maximize the creditor’s profits through interest payments. To save money and eliminate your debts efficiently, you should be paying more than the minimum amounts required. This only applies to credit cards, which as revolving debts have a payment schedule that increases and decreases based on your current balance.
- Don’t waste extra money on your mortgage. Making small extra payments on your mortgage doesn’t really do anything to help you in the short-term. It’s true you reduce the debt faster, so you may finish paying off the loan in 29 years instead of 30 years. However, your mortgage has a fixed payment schedule, so paying extra money on your mortgage doesn’t reduce the amount you are expected to pay each month. As a result, you get a bigger benefit from paying off unsecured debts, such as your credit cards.
- A debt payment calculator is your best friend. Want to know how extra payments will affect how quickly you can eliminate a debt and how much interest you’ll pay over time? A debt calculator is your best friend, because it can tell you that and more. You can find out additional charges on the credit card will increase your balance, as well as compare how much of a difference APR makes in the amount of interest over time. Even better, you can find good debt calculators online for free, so it’s an easily accessible resource even if you are short on cash.
- Don’t be afraid to ask for advice. The financial world can be complex and confusing. If you need an alternative way to pay your debts off or need to look into options for debt relief, it can be hard to know which option is really the right choice for your finances. If you need help with debt, contact a nonprofit credit counseling agency to speak to a certified credit counselor about your situation. You can get free advice and have better peace of mind that you are making the right choice for your situation.