How to manage your personal debt
[14 strategies]

If you use credit wisely, you could avoid risking more debt. Now it’s time to get credit smart and manage your personal debt.

Like or loathe it, credit is part of our lives and is often associated with unmanageable debt.

Credit reports and credit scores act as your financial health check-up when you apply for new credit. Whether you’re trying to obtain credit for the first time or want to rebuild your credit standing, the only way to make a strong credit history is to use credit wisely. 

Credit cards, loans, overdrafts and alternative borrowing have strict terms and conditions. If you don’t use credit wisely, you could accumulate more debt you cannot repay.

However, if you always repay on time and become credit smart, you will avoid credit interest and make some year-round savings.

To remain in control of your credit finances, here are 14 ways to use them wisely.

14 ways to manage your personal debt

1. Get a copy of your credit report

Your credit report lists all your accounts and the debts you are indebted to repay. 

It is a good idea to scrutinise your credit report annually, especially before you make a significant purchase.

Several countries, including the UK and USA, have credit report agencies to request a copy of your report. Other countries use their local banks as a record of outstanding debts.

Please also consider reviewing your information from the other national credit reporting companies. Estonians can request their report if they are an E-Krediidiinfo Pro user.

2. Make up a budget and stick to it

It is a bad idea for anyone to use credit to support their current lifestyle beyond their means. If you cannot support yourself, do not overextend by getting more debt. 

Make a budget and stick to what you are permitted to spend within it – making cutbacks should you not sustain your spending level. 

It’s easy to create a budget – most banks have a budget planner, or you can simply create your own. Write down all your incomings, salary, support benefits and income from other sources like shares and savings.

Then, offset them with everything you spend each month, including food and entertainment. If you have a surplus each month, then you’re doing well. If you’re in a negative amount, you need to save somewhere. 

It may reduce the amount you spend on entertainment; you may need to move to a cheaper rental apartment or refinance your outstanding debt.

3. It's okay to have some credit, but not too much

A credit history demonstrates to new lenders and creditors how you can manage your past and existing debts. 

Even having no credit history can make it challenging to apply for new credit because lenders need more information to support them in assessing what type of credit risk you are. 

You only need a few active credit accounts known to banks and credit reporting agencies to show you are savvy in managing your credit.

4. ALWAYS pay on time

Late payments, known as delinquencies, negatively impact your credit score. This affects your ability to get credit since it indicates a more substantial likelihood that you will make late payments again or default on your loan entirely. 

If you cannot make your repayments, contact your existing creditors and ask them whether they can create a new payment schedule or reduce your interest.

5. Refinance existing credit if it helps reduce your debt burden

Suppose you cannot get a new credit repayment schedule on your existing debt or reduce your interest rate. In that case, a debt consolidation or refinancing loan is one solution.

Debt consolidation and refinancing loans can be beneficial in reducing your bet burden. 

When borrowers have an existing debt burden, they can borrow the same amount to repay existing debts and replace them with a new, single repayment.

Existing multiple debts are now replaced with one new, larger, but more manageable debt. The new loan typically allows borrowers to receive a lower interest rate and a smaller monthly repayment amount.

6. Have a mixture of credit types

A mix of credit accounts shows you know how to manage all credit types. 

A history of making loan and credit card repayments, even car and student loans, shows you can be trusted to receive more credit. 

Even better, regular monthly repayments on loans and credit cards demonstrate that you can responsibly manage all credit types, demonstrating your ability to spend and repay each month. 

7. Keep credit card balances low

A mix of credit accounts shows you know how to manage all credit types. 

A history of making loan and credit card repayments, even car and student loans, shows you can be trusted to receive more credit. 

Outstanding debt that has a high balance-to-limit ratio will impact your credit scores. 

Suppose you use your available credit (spending to the limits on credit cards, overdrafts or loans). In that case, you appear to have an increased credit risk. 

Keeping your credit balances low compared with your credit limits demonstrates that you are only tempted to spend what you can handle. 

You are more than capable of handling more significant amounts of available credit.

8. Think again when closing credit accounts

Closing a credit account should be seen as a sense of achievement. However, it is only sometimes a good obligation because it can increase your utilisation rate. 

Naturally, eliminating a few high-interest loans and credit cards is very wise. However, keep the ones with the cheapest interest rates open (even if you rarely use them).  

Demonstrating you have some existing forms of credit that are not used is better than having no credit options. If you don’t trust yourself, call your credit provider and ask them to reduce your overdraft or credit card limit to remove spending temptation.

9. Use a credit card or loan for big one-off purchases

Every year, we make a significant one-off purchase. This could be for a holiday, home repairs, or even renewing insurance premiums. 

Rather than making these big purchases all at once, you can hunt for credit cards with 0 per cent on purchases with repayments for an extended period.

Simultaneously, save up the repayments into a savings account, earning interest. Then, use the amount to repay when the 0% period ends. When it does end, ALWAYS repay the balance in full; otherwise, exorbitant interest rates will kick in. 

Suppose you wish to avoid taking a credit card. In that case, you can take out a microloan to cover the amount needed and repay between 3-12 months – before the need rises again the following year.

10. Use a credit card that contains a rewards programme

When spending regularly, it is wise to use credit cards with reward programmes that customers can use.

  • Do you travel a lot? Apply for an air miles credit card.
  • Love shopping? Apply for a credit card that pays you with points.
  • Our tip is to get a cashback credit card. The more you spend (and within reason) on the card, the more cashback you earn.

Unlike 0% purchase credit cards, reward credit cards usually don’t have an interest-free period. So, if you use them, you must pay back the balance in full every month. 

Otherwise, the cashback you accrue will be eaten up by credit card interest.

11. Never use credit cards to withdraw cash

Withdrawing cash through a credit card is the quickest way to compound interest on your debt. 

Not only will you pay interest on the amount withdrawn, but the cash-advance handling fee is at least 2% or more, meaning it costs you at least 102 (€/£/$) for every 100 (€/£/$) you withdraw in cash.

Credit card lenders must make a profit like any other business. One primary way to increase their fees is by convincing borrowers to withdraw cash through their credit cards. 

Yes, the convenience is terrific, yet the long-term consequences of repaying your debt are not worth it.

12. Never supplement your spending or borrow yourself out of debt

Suppose you are struggling to make ends meet each month. 

In that case, transferring your debts to a new credit card or refinancing loan to structure your payments may appear to be the right solution, but ask yourself – are you increasing your debt rather than reducing it?

You may crave that Instagram picture holiday, but can you afford it if you spend over your means?

Contact a debt support service for debt solutions if you’re struggling with debt. Never borrow more to obtain what is clearly out of your reach. 

13. Don't stay loyal to one credit provider

Disloyalty can pay dividends when you are searching to reduce your existing debts. 

Suppose you have a 0% credit card on purchases, and the interest-free period expires soon. In that case, move your balance to another card offering similar terms.

New cards offer enticing offers to new customers that they do not deliver to current customers. 

So, for example, once this card’s interest-free period expires, move it to another credit provider who offers similar terms—no need to remain loyal because you have been to them for ages.

However, whilst making the minimum repayments to clear debts, never add to it by making more debt with a new card. The aim is to reduce your debt burden, not increase it gradually.

Credit cards have high interest rates, thus increasing the number of fees and interest you could be paying.

14. If possible, pay more than the minimum monthly repayment if you can

Whatever credit you have, you must make the minimum monthly repayments.

Several lenders permit the early repayment of loans – doing this will reduce the amount you have to repay in interest and clear your debt sooner, freeing up funds for any future purchases you need. 

In other words, you can begin to save for the future!

Be credit smart

Credit is part of our financial lives. More of us are using credit, and that number will only grow.

The good news is that if you are credit smart, you can use credit to manage and reduce your debt. 

Remember, be smart about using credit cards, overdrafts and loans; the temptation to use them can sometimes lead to spending you cannot afford.

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