RebelCapitalist: Financial Information for the Rest of Us

Debt Management Tips

Jun 03, 2009 | By: Mr_Blue | Tags: credit cards, debt management

The following tips are unrelated but are good rules of thumb for different times in the “debt process”. These tips assume that we can afford to make payments on the outstanding debt. If we can’t then save more money for the intended purchases and use less debt. First, what type of debt to use, a good rule of thumb is to match the term of the debt (how long will outstanding balance last) to the useful life of the purchase. Second, debt payment process, prioritize and pay-off higher costing debt first.

Match Term of Debt to Useful Life of Purchase

Here is what not to do: use credit cards to purchase groceries and eat out at restaurant and then carry the balance created by that purchase on our credit card for several months or years. Use credit card for durable items such as refrigerators and other appliances and TVs and not items that will be gone or used up in a short period of time. Don’t use long-term financing, such as a home equity loan, for purchases with a useful life of couple of years or five at the most (although the days of doing this may be over). For instance, don’t purchase a new car with a home equity loan because chances are that the car will be long gone but you will still be paying the debt.

Another thing that is somewhat related to this tip and we often make the mistake in doing is to pay-off credit card debt with a home equity loan. This is bad for several reasons: 1) we are changing unsecured debt (credit cards) to secured debt (mortgage); 2) home equity loans are long-term loans but many of the credit card purchases ‘refinanced’ were for non-durable items - items with a short useful life; and 3) for many of us, we continue to incur more credit card debt - so we have the mortgage payment plus additional credit card balances.

Prioritize - Pay-off Higher Cost Debt First

This is simple. If you have owe money on, say 4 credit cards, which card has the highest annual percentage rate (APR). This should be noted somewhere on the credit card statement. If the four credit cards have the following APRs: 12%, 14%, 18%, 21%. Start focusing on paying the credit card with the 21% APR first then move down the line.

Good luck. Remember credit card debt is evil!