If your debt to income ratio is high, it could cause lenders to rate you as a risky borrower, which could have a negative impact on the amount that you are able to add to your retirement nest egg, as well as adversely affect your standard of living. Failing to make debt repayments on time or paying less than the amount due could also cause you to have a low credit score. A low credit score often means higher interest on personal loans, mortgages, automobile loans and other items which you purchase on credit. Paying a higher interest rate means larger repayments; this in turn, reduces your disposable income. If you find it challenging to manage and pay off your debt, consider employing debt management strategies such as the following:
If you have multiple loan accounts, including credit cards, try consolidating the higher interest accounts into a lower interest account. Some credit cards companies will allow you to transfer balances from other credit card companies to credit cards that you hold with them. However you want to exercise caution with this method as some charge a fee for the consolidation. If the amount of fee is more than you would save in interest, then the consolidation would not be an economical solution. Some banks provide personal loans which can be used for any reason. If you are able to get such a loan at a favorable interest rate, it may make good economic sense to use it and pay off other higher interest debts.
If you have a mortgage and the interest rate is higher than what is currently available from mortgage lenders, consider refinancing to a lower interest rate. Refinancing at a lower rate would mean lower repayments amounts, which would increase your disposable income and allow you to allocate more money towards paying off other debts. If the rate is low enough to allow you to manage a shorter repayment period, choosing such an option would reduce the amount of interest you would ultimately pay. In addition, paying off your mortgage earlier could allow you to have much more available funds to add to your retirement nest once the mortgage has been paid off. However, if you plan to sell the home within a few years, the refinance cost may be more than the amount you would save in interest. As such, if you are thinking of refinancing your mortgage, be sure to compare the refinancing costs with the amount of interest that you would save.
Protect yourself from identity theft. Identity thieves often obtain credit in their victims' names and, in most cases, victims become aware of those debts when they are contacted by lenders and collection agencies. By then, critical damage has been done to their credit scores, resulting in damages which sometimes take years to rectify. To protect yourself from identity theft:
- Take precautionary measures such as protecting your social security number by keeping your social security card and all documents that include the number in a safe location.
- Never give your social security number to anyone unless they need it for regulatory purposes.
- Use complex passwords for your online accounts and change those passwords often.
When applying for credit, try to get your loans at the lowest rate possible. This should be easy if you have a great credit score. Be sure to examine the agreement terms to ensure that the rate you receive is not just a teaser rate that would increase to a much higher rate in the future. Avoid cash advances on credit cards when possible as those amounts are usually offered at a higher rate than amounts used for purchases and, in some cases, there is no grace period for repaying these amount.
You should also check your credit at least once per year. You are eligible for at least one free credit report for each credit agency for the year. Checking your credit allows you to determine if your account has been used by identify thieves to obtain loans, among other things.
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