Close-up Of Pencil Eraser Erasing Debt Word On White Paper

Debt is how much you owe someone, but not all debts are bad. For example, mortgage loans allow us to buy a home. Even if you have a small amount of debt, it is essential to know how to manage it to help you manage your finances and your credit score.

Know Your Debt-To-Income Ratio

Knowing how much you owe in debt in relation to your gross monthly income is the first step in managing that debt. This is what is known as debt-to-income ratio (DTI), presented as a percentage. A healthy DTI is considered to be around 35%, meaning no more than 35% of your income is going towards debt.

To calculate your DTI, add up all of your monthly debt payments and divide them by your gross monthly income.

Always Pay on Time

Paying all of your bills on time is a great way to manage debt, as it will save you a ton in late payments. It also shows potential lenders that you are able to pay on time, which also reflects well on your credit score.

Pay More Than the Minimum

If you are able to, pay more than the minimum when the payment due date comes around. This not only helps pay down debt faster, but can help you save on interest and may help improve your credit score.

Remember to only pay more than the minimum when you can afford to. You don’t want to neglect other expenses like bills and groceries.

Only Take on New Debt When Needed

Apply for and open new accounts like credit cards only when needed. Having too many accounts with balances on them can become difficult to manage and could lower your credit score.

Check for Lower Rates

Yes! You can check and apply for lower rates on your current debts, especially if your credit score has improved or interest rates have dropped. This can help you save on interest payments over time.

Have an Emergency Fund

Having an emergency fund is essential in being able to pay for unexpected expenses so you don’t have to put them on a credit card. The goal is to have 6-8 months of finances in reserve.