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Sep 23

How to Handle Debts Wisely and Effectively

Reading Time: 3 mins

Debts are double-edged swords. In one extreme, they can be beneficial in setting up a profitable business or securing a permanent home. In contrast, they can be traumatizing and a source of a bad credit score. So, to be clear, not all debts are stressful. There are some good debts. When it comes to the question of handling debts, you first need to draw the line. This article aims at giving some tips on debt management and smart usage of credit cards.

Good debt refers to the kind that doesn’t drain the life out of you. These are the kinds that put money into your accounts. Examples include installment debts, the type paid in bits, with reasonable interests. Good debts will help you secure long-term investments like mortgages and school loans. On the other hand, bad debts take money from your accounts, they are revolving debts and in most cases attract high-interest rates, an example is a credit card balance. Below are some tips for debt management:

  • Categorize your debt as to whether it is good or bad debt
  • Formulate a plan to pay them off. The higher the interest, the faster it needs to get cleared
  • Strategize by recognizing who you owe. Some institutions or individuals can wait, others can’t. You need to prioritize
  • Always clear the bad debts first before moving to the good ones. Also, if a side hustle or the money you had accounted for in the plan exceeds, top up the funds set aside for debt repayments. Although the amount may appear insubstantial, always remember that a journey of a hundred miles starts with a single step
  • Another way you can manage debt is by using it as leverage to bring in returns. However, this will mean understanding the stock market. You can get some light from stock ratings. The con with this strategy is that you can win triple or more times the capital but loosing is a probability as well
  • Never shy away from seeking where to get advice from professionals who can help you

Credit cards can be categorized under bad debts. How? When you delay the monthly payments, they will attract particular interests. Also, a deferred amount can be a source of a bad credit score. However, credit cards can be beneficial in complementing big budgets, emergencies, and giving cash backs. The secret lies in the discipline and planning. Before applying for one, ensure you know why you need the card. Below are some tips that will help in the smart usage of cards:

  • First, identify your spending habits and get a card that will suit your needs—research on smart cards with various cash backs and rewards on the goods you frequently purchase
  • Have a budget of everything you need to purchase with the credit card; this helps you in monitoring your spending habits
  • Pay your credit card on time. A delay can cause deferred payments which will attract interest rates
  • Always pay the balance in full and ensure you are only spending what you can afford to pay off; otherwise, you will attract interests and deferred payments. One tip to remember is always to maintain 30% spending of your available limit
  • Always maximize your rewards, perks, and cash backs. This saves a great deal, especially if you have a credit card that offers these on the items that you frequently purchase. Choose a card with low-interest rates
  • Avoid closing credit cards. At times, we get tempted to close smart cards that we no longer use and this could harm the credit card score. First, the longer the credit card history, the better the score, so closing it affects the utilization ratio. Secondly, extended credit card history is a boost to your credit score.

Most people shy away from using credit cards for fear of drowning in debts. With the above tips, this shouldn’t be a problem anymore. Credit cards help in emergencies. Also, they are easy to carry around and secure. Finally, there is a fragile line between good and bad debt. Discipline and management are critical says Forbes on debt management.

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