There are some things in life that will just go away if you ignore them — maybe that annoying person at the gym who doesn’t quite understand boundaries. Unfortunately, debt can’t take a hint. Due to this, it’s important to prioritize your debt payments so you can eliminate it from your life.
Debt Won’t Go Away
When you don’t pay back your debt, not only does it stay with you, it can actually get worse. Anyone with debt, or considering taking on some debt, needs to understand the basics of interest. Your interest rate is a critical number that determines how much you’re going to have to repay for borrowing money. The higher the rate, the more you’re going to have to pay back to fulfill your debt obligation.
You also need to know the differences between different kinds of debt, and how interest rates tend to vary between them. Debt with high interest rates, such as credit cards, tend to get people in financial trouble. But medical bills, student loans and all other forms of debt can be detrimental as well. This is why it’s critical to make a plan for how you’re going to pay off your debt.
How You Pay Off Debt Makes a Big Difference
Your approach to debt repayment is going to majorly affect how much your debt interferes with your finances. It’s important to come up with a debt repayment strategy and stick to it. There are two main lines of thought when it comes to debt repayment—known as the snowball and avalanche methods.
The snowball method has been shown to be the most effective debt repayment approach in terms of results. More people are successful when implementing this strategy because it plays upon an important piece of human psychology. The snowball method has you start paying off your smallest debts first, regardless of interest rate. Getting those initial successes helps people stick to their plan and then eventually repay all their debt.
With the avalanche, you’re repaying the highest interest rate debt first, while maintaining the minimum on all others. This strategy is technically the best in terms of money saved. However, it can be more difficult to keep up momentum the whole way. When you can’t find a way to pay back your debts, it can lead to some dire consequences.
Uncontrolled Debt Can Lead to Bankruptcy
Few people like saying the word bankruptcy. It sends a shiver down the spines of most. But bankruptcy can become a very real possibility for people who are unable to repay their debts. Over 700,000 individuals file for bankruptcy each year in the United States. Doing this can damage your credit for years—making it even tougher to borrow money when you need it.
Working with a debt relief agency can provide a path out for people who are totally over their heads in debt. Not all these organizations have consumers’ best interests in mind, however, so it’s important to do some research before signing up for anything.
When it’s looking like bankruptcy might be a very real possibility for you, make sure you look at all your options. Bankruptcy should be a last resort, as it can seriously set you back even though some of your debts can be forgiven through it.
Your Mental Health Will Thank You
Debt is too often just thought of as a numerical value. But anyone who has been deep in debt knows it’s a lot more than that. Debt is an emotional strain. Having debt hanging over your head leads to stress, anxiety and depression. Furthermore, it can seriously strain relationships with family, friends or your significant other.
This is why you need to make getting out of debt a priority. The longer you let debt stay in your life, the longer it’s going to play games with you. Make a plan and beat debt for good.