Understanding Debt Management
Do you look at the bills that arrive every month from credit card companies and wonder how your balances got so high? Are you confused about what your debt means and how it is calculated? You're not alone. Millions of Americans get into debt every year without really understanding how the whole process works.
It sometimes seems like banks and credit unions make debt difficult to understand in order to make more money. Perhaps that's true, but whatever the case, you'll be able to pay your debt down faster if you know where the money is going and work out a debt management plan to take charge of your finances. The three main types of debt incurred by the average consumer - credit cards, mortgages and car loans - are very different from one another and will impact your finances in different ways.
Credit cards are an example of revolving credit, which means that there is no set payment schedule imposed by the issuer. In other words, you might have a minimum payment due every month, but otherwise what you pay on the balance is up to you. Since credit cards are a constant source of money, they are more of a danger to your debt management plan. As long as you use credit cards to purchase groceries, clothes, gasoline and other items, you'll continue to incur debt.
Mortgages and car loans represent installment credit, which means that a set payment schedule is imposed on the borrower. The bank has given you a certain amount of money, and you must repay it by remitting a certain payment every month.
How debt happens: Many people encounter the "snowball effect" when it comes to debt. Once you've borrowed a little, it's pretty easy to borrow a lot. Before you know it, the bills are piling up faster than coins in a vending machine. Unfortunately, it can be difficult to stall the snowball effect once it starts because debt comes with interest. You might put a $100 purchase on your credit card, for example, but if you only make the minimum payments, you could wind up paying twice that in the end. Interest is represented by the APR, or annual percentage rate, on a credit card. It might range from as little as 5 percent to more than 25 percent, depending on your payment history and credit score. As many people discovered during the housing crisis, mortgage interest rates are calculated differently. They can be either fixed or adjustable. A fixed rate stays the same for the life of the loan, while an adjustable rate can go up or down with the market conditions.
Taking control: The first step to curing debt woes and regaining your financial footing is to create a debt management plan. This is a step-by-step approach to eliminating your debt and becoming financially stable. It might require the assistance of a credit counselor for some.
One of our counselors here at Reviving Dreams Enterprises can help you understand why you are in debt and show you how to formulate a plan for getting rid of it. Without professional guidance, many consumers make mistakes and just get more frustrated which, of course, is the last thing you want.