Take time to review your debts

Your debts—from your credit cards to your mortgage, auto, home equity, student, or personal loans—are a significant part of your financial life. Reviewing your debts all at once, at least annually, can help you keep on top of your debt goals and help you build a stronger financial future.

Here is what you can do:

Order and review your credit reports. Your credit reports are available for free by law once every twelve months, at www.annualcreditreport.com. During your annual debt review, your credit reports can help you set goals for the upcoming year by showing you your problem areas. These reports give you a free overview of all of your accounts, and at the same time they help you keep your eye out for fraud.

Put together a snapshot of your debts. At least once a year, compile some basic information from each of your debt accounts to form a current debt snapshot. This will help you compare current interest rates and balances between each of your accounts, and help you measure progress from previous years.

Start by listing your credit cards. Include each account name, credit limit, current balance, APR, minimum payment, and time until payoff. Your credit card statement may include an estimated monthly payment for a payoff timeframe of three years; you can list this as well.  If you have multiple APRs for a single credit card, include a breakdown of your credit card balance with corresponding APRs.

Then list your loans. Include your original loan amount, current balance, interest rate, and monthly payment, and time until payoff. To help you focus on the order in which you pay off debts, you can list special characteristics here: for example, mortgage interest may be  tax deductible if you itemize.

Measure your overall progress. If you assessed your debt in 2011 and have a snapshot of your debt from that period, compare last year’s debt levels to your current debt amounts. If you’re just getting started now on your annual review, you can take a look back at your credit card statements and loan statements from one year ago and put together a snapshot for comparison.

Did your credit card balances fall, rise, or remain level? How much debt have you added or paid off in total since last year? Are you happy with your progress and your current level of payments? Thinking about these questions will help you create debt goals for 2013.

Which debt repayment strategies worked and didn’t work? Look over your goals from last year, and think about what you did to meet those goals. Did you set a budget limit for a particular spending category? Did you create manageable goals? Did you focus your extra funds on a specific account? Also, strategies that didn’t work can help you understand your limits and give you an opportunity to try something new.

Revise your goals for the upcoming year. Your debt snapshot will tell you which debt accounts have the highest interest rates. Focusing your funds here will save you the most money. On the other hand, paying down a small debt could give you more motivation to continue throughout the year. Choose goals that suit you and your larger life plans. With a yearly checkup to recalibrate your debt goals, you can make sure that your funds and efforts are focused where they are most needed.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com


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