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Managing Your Debt, Part 2

In part 1 of Managing Your Debt, we introduced you to what credit and debt are. We also explained a bit about how good and bad credit works. Finally, you learned how to understand your debt and to get a handle on it.
 

In this section, you’ll learn a more about where to look when you need to find how much you owe in debt. Additionally, we teach you a little about some common debt traps as well as about how having a lot of debt can affect you.
 

Finally, you’ll get a more in-depth look at how debt works, the pitfalls that come with it, and some traps that those who are heavily in debt fall into.
 

1. How to Find Out Who You Owe Money To

If you’ve ever had an experience where you looked at your check register or bank statement and thought, “Where does my money go?” then you are not alone. While plastic money makes getting through the line at Starbucks or paying bills easier, it also comes with its share of drawbacks. Very often, it’s easy to forget you’re spending money when you pay with plastic because you don’t see your money disappearing.
 

Dealing mostly with plastic money causes a disconnect between us and our cash because we are not exchanging physical money. 

When you buy something at the store with cash, you give the merchant cash in exchange for your item. However, if you pay with your credit card, you give the merchant your card, who subsequently gives you your card and the item you just purchased back. You don’t see the exchange. This tricks your mind into thinking that you have more money than you do because your payment, a credit card in this case, doesn’t disappear from your wallet like cash does.
 

This psychological trick is one of the reasons you (and millions of others like you) have trouble with debt. This section’s goal is to help you understand how to take control of “financial mind tricks” like this so that you don’t resort to debt.
 

Below, you’ll how to find out how much debt you have. Once you gather up this information, put it together in one place. This will help you stay organized as you work on getting out of debt.
 

Your Credit Report
 

Checking your credit score is simple these days: You can now go to websites to find out what your credit score is.  
 

Learning how to check your credit and to eventually boost your credit score is more important than ever. Not only does a good credit score help you buy a car or rent an apartment, it may also help you get a job or prevent you from landing one, depending on how good your credit score is. More and more employers today will check your credit score when you’re applying for a job.
 

Monthly Bills/ Statements
 

For each type of credit you acquire (i.e. student loan, credit card, mortgage, etc.), you should also get a monthly statement or bill. This may come the old-fashioned way, through regular mail, or on the web.
 

The advantage of this method (over checking your credit report) is that you can see more specifically where you’re spending your money in some cases, like with your credit cards. Your credit report won’t itemize the $10 here, $20 there that you spent. Your credit card statements will.
 

Loan Paperwork
 

If you’ve taken out a loan of any kind, you should have been given paperwork to go with that loan. This is usually some sort of contract. The lending institution spells out the terms of the loan in the body of the paperwork somewhere. With this type of debt, you usually know up front how much each payment will be. The contract also tells you how many payments you need to make until you completely pay off your debt with that creditor.
 

Personal Loans/ Agreements
 

Nearly everyone has borrowed money from family and friends at some point in their lives. These loans may be among the easiest to get and also the most dangerous if you’re not careful. When you are working out your debt management plan, you need to include these debts in your plan. Nothing turns a relationship sour faster than an unpaid debt to a friend or family member.

2. Why are You in Debt?

Although debt may seem to sneak up on you, it’s rarely a surprise once you learn how to spot the patterns of debt in your life. Most people end up in debt due to bad spending habits.
 

Some debt, like your mortgage, is harder to avoid. However, there are some financial advisors, who believe that almost all debt should be avoided. In this line of thinking, you don’t purchase anything that you didn’t save up for. This includes cars, clothing, etc.
 

This approach to debt management helps consumers to avoid debt by helping them to bypass it. That is to say, they don’t purchase anything that they can’t pay cash for. But to embrace this debt-reduction strategy requires a recalibration of your thinking patterns. You need to know why you incurred the debt. It’s also necessary to start budgeting for items before you plan on purchasing them. 

Here are some of the most common factors that lead people to acquiring debt:
 

Gaining Assets
 

You buy assets with your available credit. Some of these assets include your home and your car. In some cases, your education, which is intellectual capital and therefore, an asset, can also be included in this category.
 

Paying Monthly Bills
 

You pay bills using your credit card. This creates credit card debt, unless you pay off your balance each month. Some people who are very disciplined can do this. They use their credit cards so that they can take advantage of their creditors’ autopay function.
 

People who do this correctly will pay the bill in full once they get paid. Paying the card down to a zero balance allows them to avoid paying interest on their credit card balance. Using their card in this way allows them to build up reward points or frequent-flyer miles.
 

All of that said, if you use your credit cards to pay your utilities, then chances are good that you’ll end up with debt, unless you commit to paying down your balance each month.
 

Unexpected Mishaps and Emergencies
 

This one is an issue for many people. Emergencies can include a trip to the emergency room, a broken appliance, or to repair damage to your rain gutters after the last big storm. (A better way of dealing with this is to have money set aside - roughly $1,000 to $2,000 - that is specifically for emergencies.)
 

Buying Gifts and Other Items
 

People also use their credit cards to buy gifts around the holidays, to go out to dinner, or to buy new clothes. The issue with this, especially when it comes to gift-giving times, like the holidays or birthdays, is that people who pay for gifts this way could have avoided it. These holidays come at the same time each year, making it possible to save up for the gifts for these occasions rather than putting the purchases on your card.
 

3. Final Thoughts for Part 2

 Debt has a way of sneaking up on you. You may end up in debt because you didn’t plan for an emergency, or a repair on your home, etc … Additionally, debt becomes your reality if you use your lines of credit to buy assets, pay bills, or to buy gifts. Finally, people get into debt for many reasons. To conquer debt, you must learn why you created it in the first place.