Even if you're financially responsible, life's unpredictable nature can sometimes catch you off guard, at times making it dangerously easy to fall into debt.
Types of Debt
While being in debt is never ideal, some types of debt are better than others because of the effect the debt can have on you or your net worth. To reflect this, debt is sometimes broken up into “good debt” and “bad debt.”
“Good Debt” is debt that is an investment back into yourself or that increases the value of what you own. That could include things like student debt or things that can grow in value over time such as a mortgage or investments.
"Bad Debt” is when you borrow for something that you are losing money on. This could include things like credit card purchases for clothes or food and payday loans. Because of how quick cars lose value, auto loans often walk the line between “good” and “bad” debt.
The main difference between good and bad debt is whether the investment will appreciate and grow in value or depreciate and lose value.
That being said, even if your debt is technically “good,” that doesn’t mean it won’t still end up hurting you if you become unable to make your payments.
There are strategies to help you get back in control if you’ve found yourself falling behind or growing impatient with your debt payments.
- Debt Snowball Method: With this method, you start small and work your way up. Begin by paying off your smallest debt first. Then, take the amount you were paying for that debt and pay it toward the next smallest debt, and so on until everything is paid off.
- Debt Avalanche Method: Just like an avalanche, you knock out the big things first and then work your way down. Focus on paying off your highest interest rate first, then roll those funds into the next highest, and then the next.
- Debt Management Plan: This is a plan set up by a non-profit or credit counseling agency to help you pay off your debts. Your counselor negotiates and handles everything with your lenders, often helping you get a lower interest rate or waiving fees. Once it’s set up, you only need to make a single payment to the agency, they handle the rest.
- Debt Consolidation: Debt consolidation allows you to combine all of your debts into one payment by taking out a new loan, ideally with a lower interest rate, and using it to pay off your debts. Be careful though, sometimes you could end up being in debt longer because of the new loan and thus paying more interest overall.
Nusenda Credit Union’s Credit Score can help you gain insight into your current standing regarding debt. Simply log into Mobile and Internet Banking to view your credit score, report, payment history, and more. You can also check out our resource, Banzai Get Out of Debt Coach, which can help you make a customized plan to pay off your debt and learn more about what some of these strategies could look like for you.
At Nusenda, we’re dedicated to improving our members’ financial well-being and supporting them through affordable products, friendly service, community involvement, and financial education. We'd love to find other ways to help you reach your financial goals. Stop by a branch or make an appointment to meet with us today.
This article has been republished with permission. View the original article: Debt: Strategies and Tools