Factors That Affect Debt Repayment

Most people believe that there are many elements involved in a successful debt reduction plan. On the contrary, there are only 5 factors that would determine success or failure during your debt repayment strategy.

The Amount You Owe

In simple words, the higher the amount you owe, the longer it will take before you can pay it back. Assuming you have two credit card balances with the same interest rates and same monthly payments, the one with the higher balance will take a longer time for you to pay it off.

To get out of debt faster, make sure you create a payment strategy. If you’re comfortable with it, choose one debt and give it all you’ve got. Many experts snowball their debt and choose to pay off the smallest debts first before proceeding with the next larger ones. Whether it works for you or not depends on your preference and individual situation. Sometimes, it doesn’t matter which debt you decide to tackle first, what matters is that you get started.

Your Interest Rate

Basically, the higher the interest rate, the longer it could take to pay it off, because most of your monthly payment actually goes to interest payment rather than principal. This is why many experts view that the correct method of debt repayment is prioritizing those debts with the highest interest, so as to get them out of the way more quickly and stop the interests from rolling over. If there’s a way to lower the interest rate, like transferring a high-interest credit card balance to a lower-interest credit card, use this method if you’re having difficulty putting in a huge chunk of your monthly income towards debt repayment.

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Your Monthly Payments

Of course, this one dictates how quickly you can get rid of your debt. The more you pay, the more your balances drop. If you’re paying only the minimum amount on your balances, you are just prolonging your agony. Only pay for the minimum if it’s called for in executing a debt repayment strategy, such as during snowballing your debt.

If You’re Adding New Debt

The number one rule during debt repayment is to stop adding any more debt if you want your debt to disappear for good. It would be useless to try paying for your debts if you’re creating new ones. Make sure that you always pay on time to avoid generating fees.

Your Adherence to the Plan

There are different known tactics in paying off debt, however the strategy you choose is not the key to successful debt payment, but rather, it is how well you stick to your plan of choice that matters. Whether you decide to pay off small balances first or the highest-interest rates first, your overall success will depend on your execution. By keeping up with your planned payment allocations, making payments on time, refusing to add any more debts, and committing to a long-term goal, you can ensure that you will be able to climb your way out of debt sooner.

Signs That You Are Headed for Credit Trouble

Using credit for basic needs

Everyday necessities like food, transportation, and clothing should be paid for using your income. If you have to use your credit card to pay for these expenses that you should be paying with cash, then it’s a clear sign that you are falling short on your finances.

Skipping one bill to pay for another

While prioritizing your credit card bills is always necessary, skipping one is not. If you always feel the need to skip one bill in order to pay for another one, then your debts are already starting to get out of hand.

Transferring balances

Transferring balances should only be considered if it means consolidating your debts into a lower, more affordable loan. However, if you are transferring balances just to avoid credit card payments, you are surely headed into a big financial trouble.

Charging more than what you pay

Just imagine filling up a huge basin of water while someone throws out more water than what you put in. The same principle works during debt payment. If you charge more than what you can allot towards repayment, you will never get out of debt.

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Avoiding credit card statements

Unfortunately, avoiding your credit card bills doesn\’t make your debts go away. Hiding away from your problem only makes it worse, but if you accept and face your debts sooner, you can start working your way out of it.

Not having a plan to pay off your debts

Some people who become overwhelmed with their bills decide to just let them be and not have a plan at all. However, this could only lead to problems in the future, when the time comes that you need to rebuild your credit and you’d end up paying for a huge pile of debt that shouldn\’t been there in the first place. No matter how big or small your debt is, always make a plan for payment, and of course, with a plan comes action.

Having past due accounts

Having past due accounts only mean that you\’ve been through some sort of financial crisis that is keeping you from making on time payments. Unfortunately for you, once they become past due, it also becomes harder to get them back on track.

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Not having an emergency fund

Most of the time, not having a rainy day fund is what pushes people to use credit card in urgent situations. If you have nothing to cover for unexpected expenses that come along the way, you’re surely in for credit card trouble. Unfortunately, building up your emergency fund can be a big challenge if debt has started.

Having maxed-out credit cards

Unfortunately, having maxed-out credit cards is not merely a sign that you’re headed for debt trouble, but rather, it states that you’re already in it. As overwhelming as it may seem, you should start working out on some ways to reduce your outstanding debt and to avoid having the same problem in the future.

Good and Bad Borrowing Options

Whenever you experience financial crisis, borrowing money should always be a last resort. However, if the need is urgent and there’s no other way, the best you can do is to choose the lesser evil. These are the good and bad borrowing options that you should know about.

Good Options

Direct loan from family and friends

If a friend or loved one is willing enough to lend out a helping hand, this could be one of the best borrowing options of all. Although in most cases a relative won’t be comfortable charging you interest, it is still best to treat this loan as a business transaction. You should agree upon a fair interest rate and payment terms, and put your agreement in writing.

Credit card purchase

If you don’t need direct cash and just want to buy something, perhaps charging the item on your credit card is far better than taking out a loan and especially than making a credit card cash advance. In addition, this should be a wise option if you can pay back the bill on time and you can earn rewards as well.

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Pawnbrokers

Believe it or not, pawnshop loans are better than other short-term loans out there. Although you won’t typically get a high appraisal for your item, you’ll have that peace of mind knowing that your credit score is not affected whether you pay for the loan or not. In addition, you are not legally bound to pay for the item. If you pay for it, you get it back, and if not, consider it sold. It’s that simple. Unless your item has a sentimental value, a pawnshop loan is actually a good borrow.

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Bad Options

Credit card cash advance

Despite the convenience of withdrawing money from your credit card, there’s a huge price to pay. If direct credit card purchases can have high interests, expect cash advances to be even more expensive. The worse thing is that there’s no grace period, and interest will be charged immediately upon borrowing no matter how quickly you paid for it.

Bank advance

Almost similar to a payday loan, it is a cash advance on your direct-deposit salary. Basically, your bank offers cash upfront which you will repay upon receiving your paycheck. However, this can lead down to bigger debt problems. If your next paycheck won’t suffice and you can’t settle the loan in full, you’ll begin to drag on debt, and if you fall short on cash again, it becomes a vicious cycle.

Payday loan

With a payday loan, you will write a postdated check for the amount you intend to borrow with the interest and fees included, and the lender provides you cash on the spot. This means that the lender will automatically be paid on the next payday. However, just like with bank advance, this can be very expensive. You have the option to roll over the loan for another payday, which means the fees keep on rolling over too.

Great Reasons to Have Multiple Credit Cards

There are many reasons why people are afraid of getting multiple credit cards. First, some think that having higher credit limits can tempt them into overspending. Second, they are worried that it might be hard to manage multiple cards and they can fall behind on payments. Third, some believe that lenders would have difficulty trusting them if they have too many cards. However, all of these are not true. With responsible usage, having multiple credit cards can actually be beneficial.

Financial safety

One of the reasons why many experts view having multiple credit cards as important is because of safety reasons. According to them, you should keep at least one card with a zero-balance in a safe place away from home, so in case your purse is stolen, or worse, your house gets burned down, you’ll have a credit card to use while waiting for the replacement cards. In addition, if you’re making online purchases, it is advisable to assign one card with a lower credit limit solely for this purpose. This can help you monitor more easily for fraudulent activities and limit the damages if you’ve fallen victim of identity theft.

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Rewards

The best part of having a credit card is earning rewards for every penny spent. You can have discounts or gift certificates at some retailers, or earn free movie tickets, etc. However, make sure you understand every detail of your rewards program. Most of the time, rewards cards carry higher interest rates, which makes it impractical to use. Another thing is that most rewards cards max out and stop accumulating points after a certain amount of purchases.

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Easier bookkeeping

If you’re the type of person who uses credit cards for work-related expenses that your employer would reimburse, then setting aside a credit card for this specific task might be beneficial to you. You can eliminate the difficulty of having to separate work expenditures from personal ones. If you are self-employed, you can track work-related expenses more easily for tax deductions.

Bills scheduling

If you have multiple credit cards, you can control your spending based on your billing cycles. For example, if you have one card that ends on the 10th and one that ends on the 25th of every month, you can use them shortly after the end of each billing cycle in order to maximize the time between the purchase and payment.

Credit score aid

Some people are afraid of keeping multiple credit cards thinking that lenders will assume they’ll be more prone to debt, however, that’s not just how credit scores work. Having a lot of responsible activities is actually healthy for your credit score. In addition, if you have lots of available credit, it can help keep your credit utilization in check, making sure that your debt is as far away from your credit limit as possible.

Leverage

If you have multiple credit cards and a decent credit score, you can use them to your advantage. You can have options which you can use as leverage in order to negotiate for better deals and lower your interest rates.

Things You Should not Do When Applying for Credit Cards

Thinking about getting a new plastic card? Whether it’s your first time or not, here are the things to avoid if you want to ace your credit card application.

Applying for multiple credit cards at once

For some, multiple credit inquiries may mean looking out for the best deal, but what they don’t know is that multiple applications can actually pull your credit score down. It may start to raise a red flag, as the lender may think you’ve opened accounts in all those places or that you’ve applied to all of them and got denied for some reason.

Letting your credit score go down

Unlike before, credit companies are more wary now of accepting low-credit score applicants. Since it is impossible to know the credit score requirement of each company, make sure you maintain your score in tip-top shape. If your score is within the low or mid-level range, it would be wise to postpone your credit application until it improves or try applying for a secure credit card instead to boost your score for the meantime.

Missing your due dates

Your past payment history makes up the most of your credit score at 35%. Not only missed payments can drag your credit score down, but you can also suffer very expensive interest rates.

Canceling your other cards

Closing your accounts can result in a lower credit score because of two reasons. First, closing your older credit cards will shorten your length of credit history, which makes up 15% of your credit score. Second, it can reduce your available credit, which affects your credit utilization ratio.

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Failing to review your credit report for errors

Something as simple as a misspelled name can hurt your credit score without you knowing it. You may think that you’ve been diligent in paying your bills on time. However, if you have a too common name for example, there could be entries in your credit report that actually belong to someone else which could drag your credit score down. Even if you’re not applying for new lines of credit, you should check your credit score often.

Cosigning for someone with bad credit

Becoming a cosigner means you are taking responsibility for the other person’s actions, and if he doesn’t pay, you will. The problem with this is that the lender will typically contact you only if the other person is 90 days late with his payments, and this could significantly hurt your credit score. To avoid this problem, make sure the bills are mailed to you whenever you cosign for someone so that you can monitor if they are making payments.

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Changing your occupations frequently

Although your employment background should not directly affect your credit card application during electronic processing, moving around every so often can raise a red flag during human verifications. Frequent job changes may raise questions regarding your income stability, which the lender may see as something that could affect your repayment ability.