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How to Stay Out of Debt for Good

Last updated Nov 15, 2023

Chipping away at your debt is a good first step towards financial freedom, and if you’ve made big strides and are almost debt free, you should be proud! While being debt free is an admirable goal, it’s important to remember that life happens, and realistically there may be instances where it can make sense to take on debt. Being strategic about how you use debt and exercising smart money habits can keep you from going down the wrong path that can turn into never-ending debt.

Here’s 5 tips on how to keep your debt under control:

Tip #1: Get smart about how you use credit cards

Cards are designed to make buying things quick and easy – you’re not alone if you’re tempted to use them for everyday purchases. However, understanding how they work might make it less appealing to swipe.

Credit card interest rates can increase over time and they are a revolving form of credit. Making the minimum payment isn’t enough to get out of debt quickly because only a small portion of the payment is typically applied to your principal balance. That means it can take years to pay off your balance while costing you thousands in interest because you’re carrying an outstanding balance month over month.

Need more motivation to lay off your credit cards? Take a look at your statement and look for the “Card Act” disclosure. It states how long it would take to pay off your current balance and how much it’s costing you if you only make minimum payments. Credit cards don’t just impact your wallet – applying for new credit cards or opening up new accounts can impact your credit score as well.

Remember, if you got a personal loan to refinance high interest credit cards, don’t forget that this was your goal! Paying more than the minimum monthly payment is key to getting out of debt and staying out of debt for good, and a personal loan can fast-track you there if you use it wisely.

Tip #2: Create a budget that you can stick to (and help you save!)

A budget can help you control overspending and save money two things that help you stay out of debt and boost your credit score. Here’s how to get started on building your budget:

  • Step 1 – Record your income: include all of the after-tax income you earn each month. In addition to your salary and/or hourly wages, remember to include other income from sources like investments, Social Security checks or side hustles.
  • Step 2 – Add up your expenses: start with your obvious expenses like rent and electricity, then add discretionary spending, like dining out and buying clothes. Don’t forget to include contributions to your savings account and debt payments as expense categories. For expenses that fluctuate, like your weekly groceries or your utility bill, look back over the past 6-12 months and calculate an average.
  • Step 3 – Match Dollar for Dollar: Know where every dollar goes. If you find that you’re spending outweighs your income, it’s time to adjust your spending habits. If you find that your income is more than your expenses, that’s great news!

Creating a budget that allows you to build up some savings is a huge step toward staying out of debt and avoiding stressful situations in the future. Setting aside that extra money for a rainy day will give you a cushion you can tap into for emergency funds or unexpected expenses.

Tip #3: Be mindful of your spending habits

Creating a budget will help you manage your spending, but only if you stick to it. For many of us that might be hard, so here are a few tricks that can help:

  • Leave your credit cards at home: Bringing only the cash you need makes it obvious when you’ve overspent and impossible to give in to temptation.
  • Compare your financial reality to your budget: Regularly reviewing how much you’ve actually spent compared to what you’ve budgeted reveals the spending habits that may be knocking you off track and sabotaging your goals.
  • Sleep on it: If you really want something that you don’t need, sleep on it. That extra time and escape from the store may help you realize you really don’t need it.
  • Remind yourself of your goals: Just think about the relief you’ll have once you’re debt-free.
  • Plan ahead: Make shopping lists to avoid impulse purchases. Go grocery shopping instead of eating out or invest in a coffee maker so you’re not spending $5 on coffee each day. Planning ahead can add up to huge savings.

Tip #4: Be selective and strategic about new debt

The key to keeping your debt under control is picking a product that suits your needs and knowing how you’re going to pay it off.

You may decide it’s time to buy a house or a car, or maybe go back to school, and it’s likely you’ll need a mortgage, auto loan or student loan to do it. Or, one day you might need some credit to help in the short-term, like covering an unexpected expense or supplementing your monthly cashflow.

When deciding which product is best for you, ask yourself a few questions:

  • What’s the total cost of the loan? Don’t get interest rate confused with APR. APR is the best number to use to know the total cost of your loan.
  • Do I want to pay this off sooner than the terms state? If the answer might be yes, find out if you’ll get charged a pre-payment fee.
  • Is this revolving debt or installment debt? The difference can impact how you manage your payment plan. Revolving debt can fluctuate while installment debt is best if you want fixed monthly payments that make budgeting easy.
  • Is this a fixed or variable rate product? The difference can cost you a lot over the long run. With a fixed rate you’re locked into a rate that won’t ever change while variable rates can change over time.

Tip #5: Strengthen Your Credit Score

If you ever need credit again in the future, a strong credit score will help you gain access to the funds you need at the best terms—which means you could be saving hundreds or thousands of dollars in the long run.

With free credit score monitoring and educational tools, there’s no excuse to not know your score and what’s driving it. Take advantage of Upgrade’s Credit Health to check your credit score regularly and get personalized recommendations on how you can maintain or improve your score.

Final Thought

Managing your debt starts with rewiring how you manage your money and your everyday spending and being selective about how you use credit. Do your research to understand how credit works, which products offer the features and benefits that will help you reach your goals, and most importantly - only borrow what you can afford to pay back.

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