credit_cards.jpgThere are some steps that anyone can take to help them change their poor debt management habits to good ones. It’s just a matter of getting our financial lives under control and getting a good understanding of what triggers you to spend and save. So, even though some experts tell you to get rid of all your credit cards or never take out a payday loan, the truth is that this is really not a panacea for bad debt management. Even cutting up credit cards and closing accounts can have a detrimental effect on your FICO score and cost you money in higher insurance and interest rates. So, what’s a person to do?

Here are some steps to get you started:

  1. Get some expert advice.
  2. Reduce your debts as quickly as possible.
  3. Manage your income and expenses proactively.
  4. Look at what financial tools you use.
  5. Understand your own money psychology.

Get Some Expert Advice

If you are in debt, go to a credit counselor. There are many free local services that can help you get a handle on your finances. Do not pay for these services and be careful whom you speak with. Always check out any financial adviser with the Better Business Bureau and through references. Once you have some advice, you can start to see what your options are to get out of debt.

Reduce Your Debts Quickly

Long-term credit card debt is never advisable and this is the one area that financial experts agree upon. If you have a long-term debt you are trying to meet or if your credit card debt has turned into long-term debt, it’s time to find other solutions other than a credit card, which have variable interest rates. People who end up with large balances on their credit cards have turned a short-term solution into long-term debt. This carries the risk of defaulting on the debt, being late, or taking many years to pay off the debt fully. The goal here is to shorten the amount of time you are under debt while limiting the risk of potential interest rate increases on large balances.

If you are looking for a long-term solution, one should try to convert the debt to a shorter term, fixed rate, solution and make it a priority to pay it off. If you have a mortgage, for instance, that has an adjustable rate, you can refinance to a fixed rate and save money. If you have a credit card debt, you can convert it to a fixed rate consolidation loan and this will also help you pay it back faster. The only times when a refinance or consolidation loan incurs more risk is when it is tied to an asset like a home, as in the home equity loans. However, even this option has its uses and needs to be evaluated on an individual basis.

Manage Your Income and Expenses

If you don’t have a budget, now is the time to start one. If you start doing yearly budgets, it becomes easier to see what has caused financial road blocks over the years and how you spend your money. It can also provide some insight into expenses that might occur in the future either due to seasonal expenses or maintenance costs.

Look At Your Financial Tools

There are different financial products out there for a variety of different situations. There is no “one size fits all” financial product and credit cards are no different. People who are very wealthy often carry a couple of credit cards, not because they need them, but because they want this tool available to them in particular situations. Credit cards make it easy to pay for things online and offer some security against fraud, unlike a debit card. They are accepted most anywhere you travel and can come with some great reward perks. These can include miles for purchases, discounts on vendors approved via special promotions, and a host of other kickbacks. However, they can be mismanaged, just like any other financial tool in you arsenal.

Credit cards do come with variable interest rates, which make it easy to get into trouble with them. Make a late payment and your interest rate can go from less than 5% to 30% overnight. That doesn’t mean they are a bad product, it means you have to follow the rules to get the best use out of them.

So when experts advise you to dump your credit card debt, they aren’t necessarily saying that credit cards are hurtful. What they are saying is that any long-term debt is not going to help you build wealth. Debt with variable rates are also a sure way to get in trouble because you will find it harder and harder to pay off the debt the larger the balance is and the higher your rate becomes. So, understand each financial tool you are using to leverage and repay your debt and follow the rules to avoid penalties and late fees while shortening your time in debt.

Understand Your Own Psychology

You alone know what your financial psychology is like. Do you tend to spend every cent that comes your way or are you a disciplined saver? Do you budget or are you less careful with your finances? Are you a compulsive shopper or can you wait to make a decision on a purchase? Do you have a weakness for a specific commodity like electronics or beauty treatments? How successful are you with long-term financial goals? All these things contribute to how well you might or might not do in the long-term with your finances. If you are disciplined but overly-conservative with spending, having a credit card will probably not appeal to you or cause you to get into debt, like others who use it to splurge on unnecessary items.

For those that aren’t as confident of their motivation to pay back their debts without some penalty hanging over their head, they might want a payday loan which requires payment on the next paycheck cycle. This can also be a way for people who need more structure in their repayment plans to plan for that by choosing a product that matches their money personality.

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