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Five ways to smartly manage your debt
Not many of us would volunteer to trudge up a steep hill with a heavy load on our backs. Yet carrying debt is common today: Eight out of 10 Americans have some debt and 80 percent carry it into retirement. Even households earning $75,000 annually average $9,200 in debt, according to Debt.org.
But here’s the good news: Manage your finances well, and it’s like you’re sprinting with the wind at your back. How does that work? When you’re responsible with your money, tools such as credit cards and loans can help you live within your means. When you pay attention to interest rates and manage your personal credit history, carefully managed debt can be a strategic tool to help you get what you want, without paying too much.
Obviously the more debt you have, the more interest you pay, and you’ll often pay a higher interest rate than someone with little debt. Over-borrowing is a slippery slope that can quickly become overwhelming. Here are five guidelines for smartly managing your finances, your credit and your debt:
- Set the right financial goals.
Make sure you are using debt refinancing to improve your financial well-being. Debt refinancing can be a solid financial strategy if:
- You’re looking to minimize interest costs.
- You have promotional or variable loan rates that are coming to an end.
- You can save money by consolidating multiple debts into one payment at a lower rate.
If you’re looking to stretch your monthly budget, don’t do it by refinancing loan terms to lower your payments. Extending payments over longer periods may become a more expensive way to pay off debt, and can be viewed negatively by lenders.
- Learn what can be refinanced, as well as the time and effort to do it.
- Many people believe refinancing is only for credit cards. In fact, you can refinance many other kinds of loans such as those for a car, boat, motorcycle, RV, tuition, even a timeshare.
- The process and time involved to secure refinancing varies. Some lenders require branch visits and/or paperwork; others, have completely online processes.
- Understand how your lender puts funding in place and how quickly it can be received.
- Evaluate your current debt for opportunities to save.
- Obtain a free copy of your credit report through a credit bureau or online site. If your credit has improved since you originally financed, you may be able to refinance your debt at a lower interest rate.
- Look at the amounts you owe and determine where you are paying the highest interest rates; which loans have the longest payment terms; and whether you have several debts that could be combined for savings and simplicity. Debts that are paid over a shorter term at a lower rate, yield savings, quickly.
- Review different refinancing strategies.
- Balance transfer: Transferring credit card debt to a different card with a lower rate can be a good opportunity. Transferring a remaining balance from a card with an expiring low introductory promotional interest rate to a new low-rate card is also a way to minimize interest costs. Consolidating debt from several cards onto one with a lower rate is another way a balance transfer can save money.
- Personal loan: People with good credit may be able to obtain debt consolidation financing at a lower interest rate and/or shorter term than what they are paying.
- Home Equity Line of Credit (HELOC): Debts can be refinanced through a loan against the value of your home. Consult your tax advisor to determine whether the interest you’ll pay is tax deductible.
- Shop interest rates and costs.
- Many companies offer debt refinancing, so it is important to shop around for the lowest rates and, if possible, avoid fees.
- Use the Internet for efficiently researching your options and getting a loan.
- For balance transfers, an average 3% fee is typically charged. For example, a $20,000 transfer will cost an additional $600. Make sure the overall interest savings outweighs the cost.
- Not every lender charges fees or points for a personal loan.
“Refinancing is often a smart solution for consumers attempting to lower their monthly payments and reduce the total amount spent on loan repayment,” said Todd Nelson, business development director at LightStream, a national online lending division of SunTrust Bank. “With the right research and goals, debt refinancing can enhance financial freedom, while still managing to keep savings or high-performing assets intact.”