When finances are tight, many people turn to their credit cards or home equity if they need money. However, racking up extra debt to deal with financial difficulties is a strategy that's almost sure to backfire. Here are some quick tips on avoiding extra debt when money is tight.
Continue to pay down debt
The most important thing to remember when money gets tight is that you should continue to pay down your debt whenever possible. Even when you have less money in your wallet, you should be following the three golden rules about debt:
* Always pay more than the minimum amount due. If you pay just the minimum, you'll only be paying off the interest, and it'll take you years to pay off your total debt. Even if all you can afford is £10 more than the minimum, you'll be better off than just paying the least amount possible.
* Avoid running up unnecessary new charges. This goes without saying during tough financial times. Read on for ideas on how to avoid new charges below.
* Pay down your highest interest card first. Work out which of your cards is charging the highest interest rate and put more money toward that one.
Avoid new debt
People often turn to credit cards or home-equity loans to cover basic costs during tough financial times. Though this strategy may cover your expenses for a few months, it will almost certainly put you in a worse situation in the future. If you don't have the money now, you probably won't have it later when it's time to pay back what you've borrowed. If your financial situation is tight enough that you are considering taking out a home equity loan or charging basic expenses to a credit card, you may find it helps to talk to a financial expert or credit counsellor about how you can reshape your finances.
Here are some more ways to avoid debt when money is tight:
* Remember that a home-equity line of credit is still debt - it just uses your home as collateral. Many people have been taking cash out of their homes to save up for an emergency, but they don't realise that they are actually losing money by doing so. Once you take out a line of credit, you'll be paying at least 5 percent interest, which is far more than you'll be able to earn if you keep the money in a savings account. It just doesn't make financial sense to use home equity to build a "financial cushion." You're far better off restructuring your expenses and saving the cash instead.
* Cut back on expenses before using credit. Most people can find something in their spending that can be cut. Try this first before you turn to credit cards or a home-equity loan to cover regular expenses.
* Put a freeze on credit. Sit down with family members and agree not to use your credit cards for a certain amount of time. This will help you tackle your current debt without adding new debt. You may find it helpful to remove your credit cards from your wallet or purse or to put a reminder note on your card so you're not tempted to use it.
* Get help. Again, if your financial situation is so tight that credit seems like the only place to turn, consider getting help from an expert. A financial counsellor can help you create and stick to a budget and pay down your debt instead of adding to it.
It may not be easy to avoid debt during tough financial times. It might take discipline and sacrifice. However, when money is tight, you'll feel better knowing that you're taking steps to secure your financial future, not putting it at risk.
very helpful. Thank you very much.
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