By making some strategic moves in the way you use and manage debt, you can gain a number of benefits. Of course, you shouldn't over-extend yourself financially, but, with discipline, you can make debt another tool you can use to reach your financial goals.
Choose the Right Credit Card
- If you don't always pay your balance in full, look for a card with a lower interest rate. A lower rate can save you hundreds of dollars a year.
- If you want to build rewards like cash back, airline tickets or free hotel stays, look for a card with rewards that don't expire and, for travel rewards cards, ones that don't have restrictions on when and where you can use your rewards.
- Compare fees with the benefits you'll gain. In addition, be aware that rewards cards usually have a higher interest rate.
Be Smart About How You Use Your Credit Card
- The best approach to using credit cards is to purchase only what you can pay off in full each month. Remember, when you do not pay your balance in full, you'll be charged interest on your average daily balance, which includes any new charges.
- If you're having trouble paying your credit card bills in full one month, talk with your lender. You may be able to negotiate a lower interest rate or have fees waived, especially if you usually pay your balance in full.
- In some situations, a balance transfer can be a good debt management tool. If your lender offers a low or no interest rate transfer option, consider transferring higher interest debt. This option only makes sense if you'll be able to pay off the transfer during the low-rate period. Also, be sure to add up any transfer fees to see if this option makes sense for you.
Get More from Your Auto Loan
Like careful management of credit card debt, an auto loan can be a tool for building a stronger credit score when you make all payments on time and in full.
- Before you buy your car, explore all your borrowing options. Check your bank, local credit unions and other financial institutions and compare the rates, fees and terms they offer with dealer financing options.
- If possible, pay down your loan more quickly by making more than the monthly payment. Quicker payoff can save you hundreds of dollars in interest. Check to make sure you can have the extra payment applied to the principal of the loan to get the biggest benefit.
- Avoid longer-term loans if possible. Cars lose their value rather quickly, so choose the shortest loan term you can comfortably afford.
Be Careful When Borrowing Against Your Home
- A home equity loan or line of credit can help you get access to money you need, but remember, if you can't make payments, you run the risk of losing your home.
- Check to find out if the interest on your loan is tax deductible.
- Find out if the interest rate is fixed or variable. A variable rate means your payments can increase significantly.