Wednesday, June 16, 2010

Getting rid of debt

There are 2 types of debts, good debts and bad debts.

Good debts are the ones incurred to purchase assets such as shares. It is important to mention that in this case, any dividends from the shares should be used to pay the debt.

Bad debts are the ones most people get to buy things that are not assets. Clothes, big TVs, cars, big and expensive houses, the list goes on.

Following are some simple tips to pay off bad debt:

Strive to make your payments on time
Most credit card companies will charge fees for late payments so make  sure you make your payments always on time.

Pay more than the minimum amount

Credit card companies are not interested in you paying off your credit card debt. They want you to have as much debt as possible so long as you can make your minimum payments.

The reason for it is that they want you to keep incurring interest charges so they keep on making money.

You need to pay as much as possible in order to reduce the amount of interest you pay. This is obviously conditioned in you having the cash flow to make the extra payments.

Make repayments as often as possible
In most types of loans, interest is calculated daily. In your to reduce that interest it is important that you make payments as soon as your money is available. Don't wait for the monthly statement to arrive, pay as much as possible, as often as possible.

Make payments where you are incurring the highest amount of interest

If you incur more interest charges than interest you earn on your savings account, use your savings to pay off the debt. It does not make sense to keep money away earning 4% where you are incurring a 12%, or even higher, interest on your unsecured debts.

Increase your cash flow
The quickest way to pay off your debt is by earning more money and using it to get rid of the debt. This is not easy, especially if you work hard during the week. You certainly don't want to spend your weekends doing some work away from your family.
This may be necessary until your finances are back on track.
The most important piece of advice is not to incur bad debt if possible. Prevention is always better than cure.

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