Managing Debt

[upbeat music] [Female voice] No one likes being in debt, but sometimes, well, you have to borrow money in order to invest in something big for your
future like your college degree or a house like Hector. Hector knew it was
important for him to make a plan to pay his existing debt in tandem with a good
spending plan that would help him avoid unnecessary debt. What is debt? Well
simply speaking, debt is an amount of money you borrow that must be paid back. Whether it’s borrowed with a loan or through a credit card, it is money that
has to be paid back and usually with interest and fees. Hector learned that
there are two kinds of debt. There is bad debt like car loans and credit card debt
and good debt such as a student loan, a home mortgage, and business loans. An easy
way to think about this if that good debt is an investment in something that
will increase in value. For example, student loans are an investment in
yourself, and if used wisely, can be a great tool to help pay for a
degree that will increase your earning potential and quality of life. When his
loans go into repayment, he will need to make his payments on time and in full to
ensure his loans remain in good standing. If he doesn’t, there could be serious
consequences for his credit and overall financial well-being. Bad debt is when
you borrow money for something that does not increase in value. Unfortunately, you
may not always be able to avoid bad debt. For example, most people don’t have the
resources to pay cash for a car. However, you should always be cautious about how
much bad debt you take on, and there are other ways that debt may get away from
you, resulting in debt distress. Hector had many of the signs of debt
distress like only making minimum payments, using his credit cards to pay
living expenses, and even paying his bills with his savings.
Fortunately for Hector, he discovered there is a smart way to borrow. While he
was a student, Hector created a spending plan to see
how much he needed to pay for his basic educational expenses. Even though he was
offered more in loans, he only borrowed what he needed based on his spending
plan. Hector also made use of loan calculators
to determine how long until his loan is paid off, what would happen if he made
extra payments, and even how long it will take him to pay off his credit cards. One
way to pay his debts was to plan a month at a time and prioritize the debts. He
could do this by starting with either the debt that has the highest balance or
the highest interest rate. Instead, Hector chose to use the snowballing approach. He
listed his debts from smallest to largest and paying the minimum balance
on all of his debts while paying more on the smallest one. When he finished paying
off the smallest debt, he then put that payment amount towards the next smallest
debt until he paid that one off. Then he repeated the process until they were gone.
Hector knew not to get impatient and go for the quick fix. He made sure to avoid
the temptation to use pawnshops, payday loans, or title loans to try to resolve
his debt. Instead, he made a plan. In addition to creating and using a
spending plan, he prioritized his debt repayments, prioritized his basic
expenses, and worked his debt repayment into cost on his spending plan. Hector also looked for assistance by
speaking to the folks from the Bears for Financial Success program on campus. Now,
Hector controls his money, his debt, and his future. And with a solid spending
plan and debt repayment plan in place, you too can become an empowered
financial decision maker like Hector.

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