There are situations where debt is best to be avoided. Credit card debt for example, can lead to sky-high interest charges and lower credit scores when you can only afford to pay the minimum monthly payment. A car loan with a monthly payment that is unaffordable in your budget can put you at risk of falling behind on payments and can also affect your ability to cover other important bills.
6 Tips To Avoiding Debt
1. Build an Emergency Fund
Experts suggest saving three to six months’ worth of essential expenses to provide a savings in the case of you losing your job. An emergency fund can also be used to cover unexpected expenses that would otherwise go on a credit card.
2. Create a Budget
It is easy to fall into debt when you are overspending or making purchases on your credit card that you can not afford. The best way to avoid overspending is to create a budget.
3. Create a Savings Strategy
A savings strategy can be used to create an emergency fund and to set aside money for other goals. When you separate money from your checking account, you’re less likely to spend it. It is recommended to set up automatic transfers each month to your emergency fund, retirement fund, 401(k), or other savings account.
4. Pay Your Full Credit Card Bill Each Month
One of the best ways to avoid debt is to look at your credit card like a debit card: Only buy items you know you’ll have enough money in your checking account to cover by the time your bill is due. You’ll never pay interest and your credit utilization will stay low, potentially strengthening your credit score. But most importantly, you won’t accumulate debt that may be difficult to get rid of.
5. Don’t Over Borrow
When you seek other types of credit, like a car loan, mortgage, student loan or personal loan, opt for the smallest loan possible that will help you meet your goals. By doing this you will have a lower ongoing monthly payment.
6. Keep Your Credit Score Strong
Debt may be impossible to avoid if you’d like to buy a house, go to college or buy a car. But you can limit your monthly payments and get a lower interest rate with a good credit score. The higher your score, the more likely it is that a lender will not only accept your application, but that you’ll get the best terms possible, saving you money.
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