5 Things You Probably Didn't Know About Paying Off Your Debt    
Whitepapers on Collections & Recovery
Download PDF version

Source: huffingtonpost.com

For many of us, February is a financial wake-up call. The holidays have come and gone and the excitement of the New Year has waned. Reality hits as credit card statements arrive, forcing us to face our holiday overspending. Many Americans set lofty financial resolutions for 2014, but how many have already fallen short just two months later?

According to the Federal Reserve Bank's latest "Household Debt and Credit Report", the third quarter of 2013 marked the largest household debt increase since the first quarter of 2008. One of the major factors contributing to the increase was a $4 billion rise in credit card debt.

If you're one of the many Americans overwhelmed with debt, February is a perfect month to start taking control. While you may still be feeling the sting from last year's financial shortcomings, its early enough to chip away at your debt and form better habits for the year and beyond.

With that in mind, Bank of America has partnered with the Khan Academy to develop Better Money Habits, a website that can help you achieve your financial goals.

Here are five things you should know about managing your debt:

1) You're not alone

The average credit card debt per borrower is approximately $5,235, according to the TransUnion "Industry Insights Report" for July to September 2013. While credit card debt may be appropriate at the right time, decreasing your debt gives you more options. It's important to have an exit plan rather than use credit cards to stay afloat. To ensure you don't fall into a cycle of debt, start taking the steps to pay it off and change your financial behavior so you can achieve your goals. For some simple tips to start incorporating today, watch this "Steps to better money habits" video.

2) Knowing what you owe is half the battle

Be honest with yourself. This starts with understanding your overall debt picture - from longer term debt that may be helping you achieve your objectives, such as student loans and a mortgage, to shorter term credit card debt. When looking at your credit card debt, itemize all of your credit card balances and take a close look at your debt to credit ratio - that is, the amount of money you owe versus your available credit. As a general rule, you should aim for a debt-to-credit ratio of 25 percent or lower.

Developing and following a monthly budget will also help you pinpoint exactly how you're spending your money, so you can easily identify where you might be able to free up funds. Putting this extra money toward your credit card balances each month puts you one step closer to creating better money habits once and for all.

3) Setting a realistic action plan can help you achieve your repayment goals

In order to start easing credit card debt, you need to have solid, incremental financial goals in place, which will help you stay organized and on task. While it would be nice to pay off your entire debt by the end of 2014, it's not always realistic. Taking a strategic approach and planning out your payments over the next two, three or even five years will put you on the right track toward greater financial security.

Also, numerous research studies, including Kenneth Blanchard and Spencer Johnson's popular SMART approach to goal setting, suggest that striking a balance between a challenging goal and a realistic goal is the key to sustained success. So, when you are first starting out, set goals that are easier to attain. Then, as you hit key milestones and your balances continue to drop, force yourself to become more aggressive in your repayment plan to ensure success.

4) Choosing the right debt repayment strategy is key

So, what's the best way to approach repayment? There are numerous ways, but two popular strategies are the "Snowball Method," where you prioritize your payments based on balance, starting with the lowest; and the "High Rate Method," where you pay your debts according to interest rates, with the highest rates first. You can learn more specifics on each of these methods by watching this "Strategies for paying down your debt" video. It's really a matter of personal preference as to which method is best for you, but sticking to the strategy is key.

5) Understand that your plan is not set in stone

No matter which strategy you decide, it's important to realize that your plan should always be fluid. Continually evaluate your repayment progress and financial situation to determine if any changes should be made. Whether it's additional income or a new car payment, your changing financial situation needs to be kept in mind in order to achieve success. And a great indicator of this success and overall progress is your credit score. Checking it every few months will help you assess your status as you continue to work through your plan.

For more information about getting on the right track this year, including simple, interactive videos, visit BetterMoneyHabits.com. If you'd rather speak with someone face-to-face, seek help from a certified financial professional - make sure you look for one who works for an accredited nonprofit consumer credit counseling agency and is a member of the National Foundation for Credit Counseling.

However you choose to get there now is the time to review how you are managing debt, save and improve your credit score.

Story Options

Copyright © 2000-2020 Kollect Systems
All trademarks and copyrights on this site are owned by their respective owners.