Debt taken to achieve a goal or out of convenience can be useful as long as you have a plan for paying it off. To avoid desperation debt, build an emergency fund. A 2016 report from public policy think tank Urban Institute found that savings as small as $250 can help consumers avoid missed bills and even eviction.
IS YOUR DEBT AFFORDABLE? Comparing your debt load with your gross income can be a helpful tool for seeing if it’s manageable or becoming too large to tackle on your own. Leaving aside mortgages and student loans, since they’re generally more manageable forms of debt, here are some guidelines to consider: DEBT LOAD UP TO 15% OF INCOME: This amount is likely affordable but is worth addressing. If you’re carrying a moderate credit card balance, for example, paying it off can free up cash and save on interest.
DEBT LOAD FROM 16% TO 39% OF INCOME: Debts in this range get increasingly difficult to pay off. You may be able to make them more affordable by reducing interest or payments, such as with a balance transfer credit card or a personal loan. If you can’t qualify for one of those, you could explore a debt management plan with a nonprofit credit counselor. DEBT LOAD OF 40% OR MORE OF INCOME: Debt loads this high can be insurmountable. Use the free consultations offered by many nonprofit credit counselors and bankruptcy attorneys to see if debt relief might be right for you.
Realize how uncomfortable you are with your debt and that it’s in your power to make changes.
Know how your debt compares with your income and use that perspective to understand which approach is the most logical.
HOW IS YOUR DEBT AFFECTING YOUR LIFE?
Think about how debt is impacting your life overall, says Thomas Nitzsche, media manager at nonprofit credit counseling agency Money Management International.
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