“Reducing debt is crucial for financial stability, benefiting credit scores, easing money management, and saving on interest rates. By making a comprehensive list of debts, being transparent about spending habits, consolidating and calculating payments, checking credit reports, and strategizing with methods like avalanche or snowball, individuals can pave the way for a more secure and prosperous financial future.”
INTRODUCTION
Debt is the amount of money you owe to a person for a business. Usually, the borrower amount has to be paid back within a specific period, with the interest rate and the principal amount of the loan.
The amount of the debt approved depends on the creditworthiness of the borrower and usually the past credit history is taken into consideration.
There are a variety of debts available such as business debt, revolving debt, joint debt, corporate debt, student loans, mortgages, etc. Each of them has their own set of rules and terms.
Debts are essential for any business to increase its growth. Debts are cost-effective, which enables businesses to grow by providing much-needed funds for their inventory, advertisements, hiring employees, purchasing capital, etc. Likewise, individuals need debt to make purchases that are beyond their income capacity such as housing, vehicles, education, medical expenses, weddings, etc.
WHY IT IS IMPORTANT TO REDUCE YOUR DEBTS?
Debts are essential to meet your financial requirements but at the same time if not handled properly they can cause serious financial instability in your life.
Reasons why it is important to reduce your debts:
- HELPS TO IMPROVE YOUR CREDIT SCORE
Your credit score is a three-digit number that gives an overview of your creditworthiness. The higher the credit score the better prospects of getting approved for loans. factors such as your credit history, how long you have your existing loans, timely interest payments, missing any payments, and the amount of debt you owe play a huge role in determining your credit score. the percentage of debt you are using currently from the total amount is called as credit utilization ratio. When you reduce your debt the credit utilization ratio also reduces and it has a positive impact on your credit score.
- EASE OF MONEY MANAGEMENT
Debts can be intricate, especially if you have multiple debts with varied terms and interest rates, and trying to manage so many debts will increase the chance of missing payments. But when you reduce and pay off some of your high-priority debts it helps you to tackle your other debts and results in better management of your funds.
- HELPS TO SAVE MONEY ON INTEREST RATES
Often borrowers get trapped in the piling-up interest rates. The longer you have the debt the more interest you will have to pay, and sometimes the amount of interest increases to such an amount that the borrower struggles to pay it. But when you pay off your debt earlier you not only save money on interest rates but at the same time it will save you from negative consequences in the future.
- HELPS TO BUILD A GOOD FINANCIAL FUTURE
When you reduce your debts, you pay less money toward interest rates. This money can be used for saving, investments, education, emergency funds, retirements, and many other important financial commitments that you have. This will ultimately help you to build a financially stable future.
5 WAYS TO REDUCE YOUR DEBTS
- MAKE A LIST OF YOUR ACCOUNT
Firstly, you should start by making a list of all your debts, their terms, and interest rates. Also, you need to assess your financial situation by taking into consideration your income and savings so that you can identify which aspect is causing you financial difficulties.
- BE TRANSPARENT ABOUT YOUR SPENDING
Debts can get overwhelming and the risk of missing payments will hurt your credit score. It’s important, to be honest about your spending habits and refrain from spending on not so important things. The more you refrain from unnecessary spending the more money you can give towards paying your debt and also it will ensure that you don’t need any further debts to meet your future requirements.
- CONSOLIDATE AND CALCULATE HOW MUCH YOU HAVE TO PAY
Consolidating multiple debts into one single debt not only provides better terms but at the same time the interest rate is also reduced. This will help you significantly in reducing your debts. Once the debt consolidation is done start by calculating how much you have to pay every month and figure out a minimum payment that should be included in your budget. Try to make regular payments without fail, however, in case the minimum payment exceeds your budget then you can try contacting your lenders to negotiate some favorable terms.
- CHECK YOUR CREDIT REPORT
You can get hold of your credit report by requesting a free copy of it. This will give you an overview of your past credit actions, and also ensure that you haven’t forgotten any of the outstanding debts. Also, it will make sure that all the accounts are taken into consideration and that there are no duplicates in your credit report.
- PLAN A DEBT- REDUCTION STRATEGY
There are many ways in which you can plan your debt-reduction strategy. There are two methods of debt reduction, avalanche and snowball methods are two effective ways in which the debt can be repaid. In the avalanche method, you first repay the debts which have high interest rates thus reducing your higher financial burdens.
But in the snowball method, you start by paying off the debts with lower interest rates and a smaller principal amount. This method gives you a sense of accomplishment and direction when you are unable to repay bigger debts.
Both methods are effective for loan repayment and their usage depends on an individual’s preference and priorities.
CONCLUSION
In conclusion, debts form an important part of both business and individuals. It helps businesses to grow and provides individuals with much-needed funds that they can use for purchases that can’t be fulfilled with their current income capacity. It is important to reduce your debts as it contributes to a good credit score, and better money management, helps to save money on interest rates, and builds a better financial future.
This article is written by Purbasha Parui, a 1st-year law and finance enthusiast from BMS College of Law, Bangalore.
