Introduction

Personal finance education entails dealing with debt. The below guidelines will help borrowers to navigate debt obligations, make smart payment decisions and understand the credit implications of new and old debts.

Paying Debt

Prioritize debt payments, starting with high-interest debt. The reason is that with more of every outstanding debt dollar turning into an additional interest expense for the borrower, paying the high-interest debt neutralizes the greater interest expense and opens up greater savings and net income in the future.

Managing Debt

If taking on new debt keep the new obligations a small fraction of current and expected income. Personal finance is not simply about income minus expenses, but about the odds of an income drop and likelihood of gaining employment within a given timeframe. During that time, the debt should not cripple personal finances. Also, make the debt useful, not frivolous. Even if for a “good purpose” such as education, make sure the classes, degrees or certifications are likely to pay off in the labor market. Sorry, philosophy aficionados.

When dealing with credit cards, understand all relevant credit card dynamics. Interest rates and minimum payments are a piece of the puzzle, but so are any reward programs, ATM withdrawal fees and other “small print” terms present in credit card agreements. Smart credit finance management requires an understanding of all credit card pitfalls and benefits.

Seeking Help

First of all, avoid “too good to be true” ads. There are no quick and easy gimmicks or loopholes to negate bad credit. If seeking help from credit counseling services, focus on reliable in-person assistance. Credit finance might be an intimidating subject for some people. Complicating it with dishonest and/or harmful credit counseling operations can only make the situation worse.

Let go of Debt

If a debt has been unpaid for several years and is unlikely to be settled, let go of old debt. Credit reports have a seven-year time span to incorporate debts into credit score calculations. The trick is that the seven-year clock restarts from the day of the most recent payment. Thus, if a debt has been ignored for six years without payment, in another year it will stop affecting a borrower’s credit score. If the borrower makes an additional payment on it, the seven-year clock is reset, making the debt a drag on credit score for another seven years, or a total of thirteen years.

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