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IRA Financial Group Blog

Your Debt History

Get out of debt
4 Minute Read

Key Points
  • Debt can be tied to you for a long time
  • Staying out of debt is your best bet
  • Living debt-free is possible

Virtually everyone wants to live debt-free. Debts can be a source of psychological distress, amongst other consequences. But how can you stay out of debt as the increasing cost of living has made credit cards the most handy option? You may first need to know your debt history, then proceed to ways to tackle them.

The information in this article will help you to trace your debt so that you can know where they came or can come from. You’ll further learn how to avoid debts, and if you are already deep in debt, you will find ways to get out of it quickly.

How Debt Starts – Types of Debt

#1. Secured Debt

Secured debt is any debt for which you give an asset to serve as collateral. The lender collects this collateral so that if you fail to repay your loan, they do not lose out completely. This is often because the lender barely knows whether you are creditworthy or not. Secure debts attract low interest rates.

A car loan is a typical example of a secured loan. Even though the lender provides you with money to purchase a car, they place a lien on the vehicle’s title. This lets them repossess the car when you fail to pay back the loan.

#2. Unsecured Debt

Unsecured debt is the opposite of secured debt; it does not require collateral. Unlike the former, here, the lender gives you a loan because of their faith in you.

A contractual agreement binds you and the lender, and when you fail to repay, the lender can go to court to reclaim their money. However, because the risk is higher on the part of the lender, the interest is usually high.

Some examples include credit cards, signature loans, contracts, and medical bills.

#3. Revolving Debt

This type of debt is an agreement between a lender and consumer that permits the consumer to borrow an amount on a recurring basis. Though there is a maximum limit to the amount that the consumer can borrow.

An example is a credit card. You can only spend within and not above your credit limit. Payment amounts for revolving debt are dependent on the amount of funds currently on loan. Revolving debt can either be secured or unsecured.

#4. Mortgages

Mortgages are prevalent among consumers. Mortgages are home loans, with the subject real estate serving as collateral.

Amongst the different types of loans, mortgage has the lowest interest rate, and for those who itemize their taxes, the interest is tax-deductible. Mortgage loans often last 15-30 years to make repayment feasible for homeowners.

Can Debt History Follow You?

This is practically how debt works in the United States. If you owe money and don’t pay it, a creditor will need to get a judgment to force the collection, and this judgment must be filed in your state of residence.

However, if you move before the process begins, the creditors might not want to continue the collection process since it may cost them more. But, on the reverse, the judgment won’t let you leave the country till you pay the debt.

A judgment may give the creditor the right to your property or accounts through a lien. Then, if you succeed in leaving the country as a debtor, on returning to the United States, the debt can still haunt you. And, poor credit has some consequences in the US; you most likely won’t qualify for an international credit card to move abroad.

How to Avoid Debts

●      The Budgeting Tool

The practice of planning your spending using a budget is a proven strategy to stay away from debt. You can divide your monthly income – allocate money to your needs and any other thing. But most importantly, ensure to set money aside for your debt repayment.

●      Avoid Credit Cards

As much as you can, avoid using credit cards. Credit purchases can cause you to accumulate debt. Pay cash when you can.

Also, if you must use credit cards, you should endeavor to monitor your spending. Work with a spending plan. You may want to place a limit on your credit card as a control measure.

●      Save For Emergencies

Unexpected expenses are largely responsible for debts. So, to avoid it, you should keep an emergency fund.

Emergency funds give you something to fall back on in times of crisis.

●      Pay Your Loans on Time

Late payment of loans often attracts a penalty; extra fees. So, try to pay your loans on time and avoid adding to your debt history.

How to Get Out of Debt

So what if you are already in debt? Here are strategies to get out of debt:

Add an Extra to the Minimum Payment

This is an effective strategy for paying off your debt history faster and saving money on interest. You can decide to add an extra to your minimum payment.

The Snowball Method

The snowball method is a debt strategy. You make the minimum payment on all your debts except for the smallest one. Snowballing payments toward your debts allows you to eliminate them quickly while paying minimum payments on the rest.

Refinance Your Debt

Refinancing debt is another way to lower interest rates and repay debt faster. You can refinance mortgages, personal loans, auto loans, and student loans.

One good means to achieve this is through a debt consolidation loan; a personal loan that likely comes with lower interest rates than your existing debts. Consider transferring your debt to a balance transfer card, they have 0 percent APR for a specified period, usually between 6-18 months.

Dedicate Benefits to Debt

Adding the money from a tax refund or stimulus check to your loans may assist in getting out of debt. You can decide to commit the entire windfall to debt or share it with your wants. But, spending all on fun fare may not be the best decision when you have a debt piled up to offset.

Negotiate For Less Than You Owe

Talking with your creditors over your debt history might just work for you. Call your creditors and negotiate to settle your debts, usually much lower than you owe. You can leverage third-party companies to offer debt settlement services, though for a fee.

With a good understanding of your debt history, you can know how to prevent debts from recurring. Practicing these tips for staying out of debt alone is sure to yield a positive result. And if you are already in debt, you most likely know what to do now.

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