Personal Debt Advice for the Newly Indebted

Personal debt advice does not have to be complicated in order to work. You do not need to take drastic steps to settle, consolidate or remove debts. When you open new debts, you should be smart with your income and debts and stay on track with a consistent payment plan.

How to Budget for Debts

The first step is to build a budget. Start by determining how much you earn, on a monthly basis. Divide this amount in half. The remaining sum is the total you can afford to spend on debts in a given month. Allocate this toward rent or mortgage, loans, and other fixed payments. In this way, you can budget new debt. For example, if you need an auto loan that will cost $300 per month, you will know how much you can afford for rent. If you are budgeting for the first time, you will have a financial advantage if you plan before you take additional loans. 

How to Prioritize Debts

In order to properly prioritize debt, you should first pay minimum monthly payments on all of your debts to avoid excess fees. When it comes to this minimum payment, no debt has a priority. You must keep up with your mortgage, insurance and minimum credit card payments. Then, your money should be allocated to high priority debts. These are debts with the highest interest rates or fees. For example, if a debt is approaching default, this debt is high priority. If you have one credit card with 7.5 percent APR and one with 7.3 percent APR, pay the first card down first with any excess money each month.

How to Stay Above Water

When you are paying debts, do not make the mistake of being too aggressive and compromising your fiscal health in other areas. Strive to put away at least three month's pay into cash savings. Once you achieve this goal, you know you will be able to continue paying down your debt even if you lose your job. If you cannot save this much, save enough to cover your minimum monthly payments for at least three months. If your current debt load is too high to allow for payment, it may be time to consider another option, such as a workout plan.

How to Preserve your Credit

You should always keep a watchful eye on your credit score. Make sure your lenders are reporting your consistent payments. Also, make sure your loan balances are decreasing continually on your credit score. When you close a loan, ensure it is removed from your report with no further pending liabilities. You are entitled by law to one annual credit report. You can request your credit report online. As long as you are borrowing responsibly, one credit check should be sufficient.


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