The first step to managing debt is to know exactly what you owe. It isn’t enough to only know how much you originally borrowed and how much you pay each month. Gather your credit statements and loan paperwork so you can make a list of all your debt with the relevant details. Include all of the debt you owe, including:
* Mortgages
* Home Equity Loans
* Home Equity Lines of Credit
* Auto Loans
* Credit Cards
* Student Loans
* Other Bank or Credit Union Loans
* 401(k) and Retirement Loans
* Personal Debts (owed to friends and family)
Write down the following information for each debt you listed. Hint: a speadsheet works great for this.
Current Balance
While it is great to know what your original loan amount was, the current balance due is what is important now.
Installment Loan or Revolving Debt?
Make note as to whether this debt is an installment loan or is considered revolving debt. If you have a set schedule of payments (such as with a mortgage, auto loan, or student loan) and a specific pay-off date, this is considered an installment loan.
Revolving debt includes credit cards and equity lines of credit where you have a credit limit from which you draw. When you pay off revolving debt you have freed up credit and can borrow again (and again).
Current Interest Rate
On your most recent statement, you will find the “annual percentage rate”; this is the interest rate you are currently paying.
Fixed or Variable Rate?
Make note as to whether your interest rate is fixed or variable. Credit card interest rates are typically variable and can even change month-to-month. Installment loans are typically fixed unless you are carrying an adjustable-rate mortgage. Make note of when the interest rate is expected to change.
Interest Tax-Deductible?
Mortgage and home equity loan interest is tax-deductible if you take the time to itemize your tax returns. Student loans can also be tax-deductible but your situation must fall into specific requirements. Ask your tax advisor or check the IRS website for details. You do not need to itemize to take advantage of a student loan tax deduction. Credit card interest and interest on most other debt (personal loans, auto loans, etc.) is not tax deductible unless the credit or loan is used by a small business or you are self-employed.
Minimum Payment Owed or Typical Payment Made
This information will be included on your most recent statement. It is usually the same month-to-month for mortgages, auto loans, and student loans but will change each month for your credit cards. By studying 6 months of credit card bills, you can estimate what you typically pay each month.
Pre-payment Penalty?
Make note if there is a penalty for paying off your loan early. You may find one on your mortgage and auto loan. Refer back to your original paperwork or call your lender if you are not sure.
This gathering process does take some time but when all of your debt information is in one place, you’ll be ready to put into action an effective debt management plan.
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