Americans like to spend money. It’s commonplace for us buy things we don’t really need but think we should have. American humorist, actor, and author Will Rogers famously said, “Too many people spend money they earned… to buy things they don’t want… to impress people that they don’t like.” Often people don’t even have the money for their purchases, racking up credit card debt and accumulating a lot of interest along the way.
Being in debt is stressful. Getting out of debt is empowering. When you take control of your finances, you feel more in control of your life. To change your spending habits for the better, be intentional about how you spend your money. Here are some tips to get you started:
- Learn how to budget. Having a budget is key to managing your money. You want to be sure you have enough money for monthly expenses as well as your savings account and investment portfolio.
- Track your expenses. Knowing how much money you spend and what you spend it on is key to understanding how you can better manage your money.
- Prioritize debts. If you have accumulated debt in multiple buckets, figure out where you want to focus your attention and what strategies you want to use in paying them off. The debt avalanche strategy encourages putting extra cash toward the payment of debts with the highest interest rates first and then paying the minimum payment of the debt with the lower interest rate. The debt snowball strategy has you focus on tackling the smallest debts first. This can give you a feeling of accomplishment and motivate you to keep going.1
- Create emergency and retirement funds. Emergency funds help offset unexpected expenses that can contribute to your debt. At least a month’s worth of income saved is a prudent amount to work towards.
- Pay on time. Autopay takes the chance that you might forget to make a payment out of the equation. You can set it to pay your minimum payment or total statement balance each month. Or get a reminder via text or email. If you make a late payment, you can expect to pay a late fee, have a penalty APR, and ding your credit score.
- Your credit score can be seriously affected by a late or missed credit card payment. According to FICO, a credit score of 607 will drop to 570–590 for a 30-day missed payment and to 560–580 for a 90-day missed payment. And someone with a 793 credit score who misses a payment by 30 days 6 will see their credit score drop to 710–730 and by 90 days to 660–680.2
- Pay more than the minimum. If you pay just the minimum, your interest charges will increase. So much so that card issuers are required to include a minimum payment warning on each monthly statement.
- Review your credit report. Your credit report is a culmination of your credit history, loans, and other financial information. It’s used to create your credit score. To have a good credit score, be sure to pay your bills on time, be careful of getting too close to your credit limit, and check for errors in your report. You can locate your score on a credit or loan statement, or speak with a credit or housing counselor.
- Avoid a debt trap. Avoid taking on multiple lines of credit. And don’t let your debt obligations surpass your capacity to repay your loans. If that happens, late payment penalties add up and you might need to take out another loan to repay a previous one.
- Qualify for lower interest rates. Personal loans are known for having lower interest rates than credit cards. You might consider using a personal loan to help with paying off your credit card. Taking action to boost your credit score can lock in the best loan rate.
Once you pay off your debt, save and budget responsibly rather than relying on your credit cards to make ends meet. That way you’ll avoid the stress that comes with managing your debt.
