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3 ways debt controls you (and how to take back control)

November 21, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

debt and debt repayment

Debt can seem overwhelming, but the key is to take control. Show your debt who's the boss by putting a plan in place to deal with it. The following are some examples of common debt problems and how to deal with them.

1. Too much credit card debt

There are many causes for this, but in many cases it just creeps up on people. A little bit of borrowing seems harmless, then an unexpected expense seems to justify a little more borrowing, and the next thing you know using credit just to make ends meet becomes a habit.

If your credit card debt keeps growing month after month, you have a problem. Don't wait until you reach your credit limits before you start to address that problem.

How to curb credit card debt

Establish a budget and use cash on shopping trips

The first thing you have to do is make rules about when you can and cannot use credit. Set up a budget, and leave your credit cards at home if you can't avoid using them compulsively.

Look into transferring balances to a low interest credit card

Next, prioritize your credit card debt, and try to shift the balances to the cards with the lowest interest rates. You might also consider transferring your balances to a card with a zero-interest promotional offer, but be wary of transfer fees that can undermine this money-saving move. Use a calculator to determine the amount of lower interest credit card savings you could benefit from before transferring over your balance.

Create a timetable for paying down balance

Finally, work out a timetable for paying down your debt. A big cause of financial mistakes is the feeling of not being in control of events. Setting out a timetable for repayment, however long it takes, is an important step towards seeing how you can take control of the situation.

2. Excess student loan debt

It used to be that credit card debt was the first major financial pitfall that young people fell into soon after leaving school, but now they often don't even make it that far before acquiring a serious debt problem. Student loan debt has mushroomed in recent years - the total amount outstanding has doubled in the past seven years.

Not surprisingly, a 2016 poll sponsored by the National Foundation for Credit Counseling (NFCC) found that almost 66 percent of adults said student loans impacted their finances in a negative way. Many of the NFCC survey participants (41 percent) did not feel confident in repaying a student loan worth $30,000.

Strategies to pay back student loans

Carefully consider taking on any more student loan debt

To get control, look to stop compounding the problem. A weak job market has driven many people back to college in recent years, but it can be an expensive refuge. Any degree you pursue should be researched as an investment, and based on an assessment of the job market, wage levels and what qualifications are necessary.

Take advantage of grace periods during loan repayment

The NFCC advises that to start coping with your debt, you should recognize the flexibility that is built into many student loan programs. These loans often have grace periods of six or nine months after graduation before you have to start repaying them. Use those grace periods to start saving up some money to make your monthly payments a little easier once they start.

Find a repayment plan that works for you

Also, while the standard repayment period for federal student loans is 10 years, you may qualify for a longer period or payments based on how much you earn. These alternatives can help payments fit into your budget, but be advised that they will result in you paying more interest over the life of the loan.

3. Overextended on a mortgage

This is a common problem because people have such high expectations for what they want from a house. Paying for your dream house may look manageable on paper, but unexpected expenses or other setbacks can quickly make a mess out of those plans.

Mortgage repayment tips

Consider mortgage refinancing

First, explore options for making your mortgage more manageable. This can include refinancing to lower your interest rate or restructuring the loan to spread payments out over a longer period. Talk to your current lender because they might be most receptive to finding a workable solution, but also shop around to see if better rates or terms are available elsewhere. Utilize a loan calculator to find out if you should refinance your home mortgage and compare your current and new mortgage rates.

Downsize to a less expensive home

The main thing about coping with this problem is to be decisive. Payments in the early years of a mortgage are mostly interest rather than principal. In essence, continuing to make payments on a mortgage you ultimately won't be able to afford is just throwing money away because you won't be building much equity. If you can't find a payment plan that works, sell out and find a cheaper home before you waste any more money.

The common denominator to all of the above is that the longer you take to confront these problems, the worse they will get. Solving these problems may take a long time, but the immediate need is getting a plan in place.

More from MoneyRates.com:

Credit Card Interest Calculator

5 smart signs you are taking on good debt

9 questions to ask before taking on debt

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