How To Understand Your Debt

Debt is more prevalent now than in the past, and most do not understand how to properly handle the different types of debt, repayment and interest rates. The first step to getting out of the hole is understanding what you need to know about your debt. You can then apply a payoff method more accurately and get out of debt faster.

What Types of Debt Are There?

Debt can either be revolving or not and secured or not. Financial consultants like Kirk Chewning will tell you that knowing which category of debt you have can help you build the right payoff plan. Revolving credit is accounts that can be paid off and then used again, like credit cards, while non-revolving credit is one-time use funds. For instance, many banks will offer a revolving credit line connected to a checking account to help reduce overdrafts continuingly and car loans that are closed once the balance is paid. In that same example, car loans would be considered secured. The vehicles act as collateral and can be repossessed if the loan defaults, but the credit line is unsecured because there is no collateral.

What Other Information Do You Need?

To pay off your debts quickly and effectively, you will want to know some specifics about your accounts besides the type of debt they fall into. These specifications include the total balance, interest rate and minimum monthly payment for each account. You will also want to have an estimated payoff date and know whether there are penalties for early repayment.

What Payoff Methods Are There?

Financial advisors will point you towards either the snowball method or the avalanche method to get out of debt. Both methods are excellent ways to tackle everything from student loans to credit card settlement, but they tackle the problem in very different ways.

With the snowball method, you tackle the lowest balance first by paying the minimum amount plus whatever extra debt budget you have set aside while still making minimum payments on your other debt. Once that account is paid off, you roll the amount you have been paying towards that debt into the payment you are making for the next biggest balance. Every time you roll your payments to the following account in line, your snowball grows.

The avalanche method approaches debt by looking at the interest rates instead of the balances. The higher the interest rate an account has, the more expensive that debt is in the long run. You start this method by paying off the highest interest rate first and then dumping that monthly payment to the next lowest rate until you are out of debt. With this method, your debt is a mountain with the highest interest rates at the top and the lowest ones at the bottom, gaining momentum on your repayment like in the snowball method but paying as little as possible in interest as you go.

The more information you can gather and compare for your debt, the easier it will be to find a repayment method and accurately calculate a budget. Knowing which accounts are secured can help you pay off debt without risking repossession of your collateral and inform your decision between the snowball and avalanche methods.

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