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What Exactly Is Debt? And How Can I Avoid It?

avoiding debt

In America, we hear about debt all the time—and for good reason. That the average American holds a staggering $90,460 in debt, according to debt.org.

But what exactly is debt? Before you can conquer something, you have to understand it. But don’t worry! That’s why we’re here. Read on to gain a thorough understanding of debt and how it works, so that you can avoid the pitfalls that have kept so many Americans in financial chains.

Okay, so let’s start with the basics.

Debt is money that you’ve borrowed from a person or company. When borrowing money from a person, such as a friend or loved one, you likely won’t have to pay interest fees. The downside is, if you default on these loans you could be doing damage to a personal relationship. On the other hand, borrowing from a company—such as a bank—commonly involves things like credit cards, student loans, mortgage loans, or car loans. The rules and regulations of the professional world can be beneficial, protecting all of the parties involved. However, these types of borrowed money can also come with drawbacks, such as high interest fees.

While debt is often talked about in a negative way, it’s important to note that not all debt is bad. In fact, debt can actually be good for your credit if kept within a healthy range. Making regular monthly payments on credit cards and loans can have a significant positive impact on your credit score and your creditworthiness. And a good credit score can open opportunities like owning a home or car. 

Wait, debt can be healthy? What exactly is a “healthy” amount of debt? 

When considering how much debt is safe to take on, the best place to start is your debt-to-income ratio. Sounds complicated, right? It’s not! This ratio simply shows, in an easy-to-read number, how much you owe compared to how much money you have coming in. And your debt-to-income ratio can be a great way to tell whether you’re taking on unhealthy amounts of debt.

To calculate your debt-to-income ratio, add up all your monthly debt payments. Now, divide that number by the amount of money you make each month. If the number is under 40%, you’re probably safe—and that means you’ll be able to handle this debt yourself going forward. However, if you’re spending 40% or more of your income on debt payments, you’re likely dealing with an unhealthy amount of debt. If this debt is causing you stress and worry, that can be another strong sign you’ve taken on too much debt. If that’s the case, it may be time to call in some professional help (more on this below).

How can I avoid debt?

While holding a certain amount of debt—and making your payments each month—can be good, you’ll want to avoid debt in unmanageable sums, and you’ll certainly want to avoid falling over that 40% line.

Here are a few key tactics to help you avoid debt:

  • Create a budget: Track your expenses, plan for bill payments, and set financial goals
  • Cut back on expenses: Prioritize needs over wants to make more room in your budget 
  • Save: It can be hard to save, but every little bit counts and could help you avoid putting large or sudden purchases on high-interest credit cards
  • Get a free copy of your credit report: Review your credit report often to see what could be negatively impacting your score. Dispute any errors right away.

What if I’m already dealing with significant debt? 

If you’re struggling with debt, don’t fret! You have options. One of the most common resources for resolving large sums of debt is called debt settlement. 

CreditAssociates specializes in debt settlement, and we’ve helped thousands of people just like you become debt-free for less than they owe. Our certified debt specialists can walk you through our process and provide a free, no-commitment debt evaluation to see if we’re a good fit for you. We’ll provide a customized plan that could help resolve your debt in as little as 24-36 months, giving you the financial freedom you deserve. Fill out our online form or give us a call today at 1-800-983-6693.

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