Credit cards and loans can feel like free money, and consumers may quickly forget how much they can actually afford to spend. Even though taking out loans and using credit cards are often necessary, there are strategies to minimize debt.
ACCC offers seven tips on how to avoid debt:
1. Set a monthly budget
Divide your monthly budget between three categories – necessities, wants, and pending debt.
2. Pay with cash
Use cash whenever possible to avoid overspending with a credit card.
3. Avoid “buy now, pay later deals”
This type of payment option is a way for consumers to postpone debt, but you may not be able to afford the entire cost.
4. Track credit card payments
Keep track of all your credit card payments to avoid accidental overspending. Also look out for fraudulent activity.
5. Have emergency savings
Debt is often created due to unexpected expenses, like medical bills or home repairs. An emergency fund is helpful to fall back on to avoid debt.
6. Stay up to date on loan payments
If you pay late, you risk accumulating late fees on top of your debt.
7. Limit amount of credit cards
Limiting the credit available to you should hopefully decrease your chances of falling into debt.
List your debts from highest interest rate to lowest interest rate. Make minimum payments on each debt, except the one with the highest interest rate. Use all extra money to pay off the debt with the highest interest rate. Repeat process after paying off each debt with the highest interest rate.
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Another option is an Individual Voluntary Arrangement (IVA). Under an IVA you make smaller payments over several years and then the rest of the debt is written off. Full bankruptcy, which is also usually completed within a year, can result in you having to sell assets such as a house or car to pay your debts.
Outside of bankruptcy or debt settlement, there are really no other ways to completely wipe away credit card debt without paying. Making minimum payments and slowly chipping away at the balance is the norm for most people in debt, and that may be the best option in many situations.
Filing for Chapter 7 bankruptcy eliminates credit card debt, medical bills and unsecured loans; however, there are some debts that cannot be discharged. Those debts include child support, spousal support obligations, student loans, judgments for damages resulting from drunk driving accidents, and most unpaid taxes.
Loans, medical debt and credit card debt are generally all able to be discharged through bankruptcy. Tax debt, alimony, spousal or child support and student loans are all typically ineligible for discharge.
Not having a budget is one of the simplest causes of debt. By not being aware of how much money you have, you could be more likely to spend more than you have access to. By monitoring your finances, you can stay on top of payments and be more aware of how much money is left in your account.
You can borrow too much for important goals like college, a home, or a car. Too much debt, even if it is at a low interest rate, can become bad debt. Carrying debt without a good plan to pay it off can lead to an unsustainable lifestyle.
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