Manage What You Borrow
We’ve looked at what a credit score is, how it affects what you pay for credit, how your credit profile, in turn, affects your credit score, and the specifics of different types of credit and their uses. Now let’s look at some other strategies for improving your finances.
Borrow only what you need.
The availability of credit is essential for the functioning of a sound economy. As individuals, we need access to credit to achieve those common milestones to which most of us aspire – owning a car or house, or going to college. These would be difficult, if not impossible, without credit in some form. But credit, as we’ve seen, also has its downside. When credit is easily available, it’s easy to fall into the trap of living beyond our means. The best way to keep credit available and affordable is to use it wisely and sparingly. Before you buy on credit, ask yourself, "Do I really need this item at this time?" If not, consider saving in advance for the purchase. In the end, you’ll save yourself a lot of money.
It’s easy for debt to get out of control. It can happen before you know it. As more of your incomes goes to servicing your debt, it becomes harder to live within your means. Then it’s tempting to borrow even more to stay afloat.
Here are some basics for taming the debt monster.
Budgeting.
The first step in budgeting is to get a good picture of your finances. Write down all sources of income. Then write down your expenses. This part can be a little daunting at first. Don’t worry about missing something right away. You can always refine your list later on. Check out the online budgeting worksheet at DoDCommunityBank.com/BorrowSmart for help. It has categories and items to get you started. Any number of software programs are also available that can help with the process. Another good place to start is to look at your last 4 or 5 bank statements. Consider carrying around a notebook to record incidental expenditures or keep your receipts. Look for items you can cut back on. The idea is to become aware of where your money is going. Once you have a clearer picture of your income versus expenditures, you should have a better idea of what changes you may have to make. For example, consider eating out less, or forgoing that morning coffee drink. Perhaps that would be enough to put you in the black. Or you might find that something more drastic, such as moving to less expensive housing, may be necessary. Either way, by better understanding your situation, you can start to make more informed and effective decisions. Once you’re spending less than your total income each month, consider putting the surplus into a Savings Account. Not only will you start to earn money on your money, but by keeping it out of your Checking Account, you will be less likely to spend it.
Prioritize your debt.
Many people have debt from more than one source. This is not necessarily a bad thing. In fact, it can help your credit score to have debt spread across different types of credit sources rather than all in one type. Unfortunately, a lot of us don’t even know the APRs and other fees our different creditors may be charging us.
Pay off your high-interest debt first.
This may seem obvious, but it’s often not done. Determine which of your accounts has the highest APR and pay it down first. If you have a lower-interest credit card, consider transferring that higher-interest balance onto it. Also consider paying down your credit cards before installment (e.g., bank) loans, since credit card balances tend to affect your credit score more adversely.
Move money from savings to pay off debt.
This may sound counterintuitive, but if you have money invested in the stock market, for example, or in savings, consider using that money to pay off your debt. Since you are not likely to be making as much return on those investments as you’re paying in interest on your debts, you may enjoy a net gain by doing so. Not that you should abandon saving, but the sooner you can pay off high-interest debt, the sooner you’ll have more to invest again in the future.
Debt consolidation.
Another way to get high-interest debt under control is to refinance it with another lower-interest loan. A debt consolidation loan can help you reduce your debt to one easy-to-manage payment. And with automatic deductions from your Checking Account, you needn’t worry about missed or late payments. Used in conjunction with the strategies we’ve already discussed, it’s a great way to get on top of your debt.
