Whether it is an auto loan, a mortgage, a student loan, credit cards, or loans from family or friends, having some sort of financial debt is a reality for most people. However, with some advance planning and resourceful thinking, it doesn’t need to be a point of excessive stress. In fact, some types of loans are helpful to your overall financial well-being — if they’re paid on time and are used sensibly.
Is there such a thing as “good debt”?
Installment loans are a debt that, when paid on time and in full, can positively impact your credit score. This includes auto loans, mortgage loans and student loans. Over time, the three credit reporting bureaus — Equifax, Experian and TransUnion — will see your commitment as a positive mark on your credit history. That in turn will show future lenders that you are reliable and creditworthy. A bonus — these types of loans tend to have a lower interest rate than other types of debt, and interest from mortgage and student loans can actually decrease your taxable income.
Some words of caution — be sure not to bite off more than you can chew. Stay within your set budget when shopping for a home, a car, or when you’re taking out student loans. And remember to check with your school’s financial aid office to see if you qualify for grants or scholarships, which will reduce the amount you have to borrow.
And know that sometimes installment loans can negatively affect your credit score. An example is when you have too much debt showing on your report. Every time you apply for credit, say to buy a house or a car, your score takes a small dip. The length of the dip depends on the circumstances. In short, timing is key. Additionally, if you can consistently pay your debt down, your credit score will improve.
And what is “bad debt”?
Beware of loans offered by payday lenders; or loans that are guaranteed with something you own outright, like your car. While they are the last-resort option for many, these predatory loans have interest rates that can go up into the triple digits. If you’re unable to pay, your transportation could be taken away, negatively impacting how you get to work, to school, or even how you get to the grocery store. Many financial institutions, like credit unions, have alternatives available, such as a signature-based line of credit, and no- or low-fee credit card balance transfers, which can help during tough times.
Don’t think that you’re alone if you’re in financial straits. Millions of Americans are suffering from anxiety and depression because they’re having difficulty taking care of their finances. According to BALANCE, a non-profit financial coaching organization, there are five ways to overcome debt stress.
- Talk about it: It will help you to recognize that there are many who feel the same pressure you do.
- Put it in perspective: Your finances might not be where you want them to be, but take a moment to practice gratitude. Hard as it might be, an optimistic attitude leads to positive changes.
- Confront it: Educate yourself on your rights as a consumer. Answer the collector calls prepared to explain your situation and how you plan to fix it.
- Fight inertia: Move on with life, but be fiscally savvy. Don’t binge shop to make yourself feel better, and remove yourself from credit card offer and promotional mailing lists.
- Prioritize: Review your spending and eliminate non-essential expenses. Determine your basic needs and work from there.
Get Out From Under Debt
The New Year is a perfect time to make a positive shift toward financial health and well-being. It may be hard to start, but the longer you wait, the harder it could be to get back on the right path.
Take a deep breath and dive into your finances. See where you stand, where you can make changes, and create a budget that takes these issues into account. If you need help getting started, try SavvyMoney, an online tool offered by your credit union to help you build a budget, determine your debt to income ratio and create financial strategies.
Finally, make the most of your financial relationships. Look online for experts who can help you set up a realistic plan. Talk to your financial institution about the products and services they offer, such as debt consolidation through low- or no-cost balance transfers, home equity lines of credit, signature loans, or refinancing. Shop around for the best deals on credit cards and loan rates. Learn about tools available, such as internet banking or mobile device apps, which can help you keep information about your finances close at hand.
As your trusted financial advisor, it’s our job at Nusenda Credit Union to help you come up with reasonable and smart solutions that can help you manage your debt, lower your stress, and simplify your life, such as:
- Home equity and home equity line-of-credit loans
- Low-rate Visa credit cards with no-fee balance transfers
- Mortgage and auto refinancing
- Debt management and financial planning workshops and budget tools
Stop by a branch, or contact us to make an appointment to meet with us today.