Love it or hate it, debt is an integral part of modern life in the United States. And, when you think about it, debt in itself really isn’t a bad thing. Neither are credit cards or loans. They only become a potentially negative thing when they’re misused or mismanaged. And once they get out of control, they can head down a long spiral and bring you down with them.

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You can think of debt as a tool in a craftsman’s toolbox. There are a number of tools in the box and a skilled craftsman knows when and how to use each one to accomplish his goal.

While a hammer does a great job pounding in a nail, it’s not nearly as effective for measuring or cutting wood. If someone tried to use a hammer to do anything other than what it was designed to accomplish, they’re likely to look silly, hurt themselves, and probably ruin their project.

The wise use of debt — whether it’s revolving (like credit cards and lines of credit) or fixed (like a secured car loan or mortgage) — is like the skillful use of the right tool at the right time for the right purpose.

So, it’s important to realize that avoiding debt isn’t really the answer. In fact, trying to go through life without incurring any debt at all can be unnecessarily difficult and troublesome, even impacting non-credit-related situations like renting an apartment. No, the skillset Americans truly need to focus on building is how to manage debt effectively.

Following are 5 tips to help you manage your debt more effectively:

Think Before You Sign

Banks, retailers, and many other organizations make credit very easy to obtain if you have a good credit score.

Nearly every department store or specialty shop has its own credit card that you can sign up for instantly while you’re making a purchase, and it often comes with the enticement of an immediate discount off your purchase.

Even if your credit score isn’t very good, there are many lenders who are willing to offer credit at high interest rates, from 25% APR credit cards to 33% payday loans.

The point to keep in mind is that lenders and retailers want you to spend money with them. They’re not concerned in the least with what more debt is going to do to your budget, your lifestyle, or your future.

So, the first tip is simple:

Don’t sign up for additional credit as an impulse buy or based on desperation. It’s always going to be a bad idea under those circumstances.

However, if you frequent a certain store and routinely spend money there anyway, and you’re confident you can be responsible with a new credit line, it may be beneficial to sign up. The point is, that needs to be a conscious decision, not a second thought for the sake of a one-time 15% discount.

Educate Yourself About Your Credit Score

Your credit score is a 3-digit number calculated by credit reporting agencies based on a number of factors, many of which the average American couldn’t even name. While it may seem somewhat arbitrary, that doesn’t change the fact that that 3-digit number can determine:

  • Whether you qualify for a 0% introductory interest rate or have to settle for a rate that fluctuates at “prime plus 23%”.
  • Whether you’re considered financially trustworthy or not, and therefore whether a landlord will rent to you or certain employers will hire you.
  • Whether or not you can afford to buy your own house one day.
  • And much more…

While there are numerous situations that are partially or fully out of your control that can result in damage to your credit score, much of the damage done could be avoided if consumers simply understood the basic factors that affect that score positively and negatively, and then actively worked to improve a bad score or maintain a good one.

So, our second tip is: Seek out reliable information about managing debt effectively and educate yourself, so you’re equipped to take strategic action.

Assess Your Current Debt Situation

As you learn more about managing debt and understanding your credit score, you’ll begin learning terms like credit utilization ratio and debt-to-income ratio. These simple calculations have a huge impact on your score, and on how willing lenders may be to offer you favorable terms, or to offer any credit at all.

  • Credit utilization ratio is the percentage of your currently available credit that you’re already using. (A simple example: If you own one credit card with a $1,000 credit limit, and it has a current balance of $200, you have a credit utilization ratio of 20%.)
  • Debt-to-income ratio is the percentage of your monthly or annual income that goes toward paying off debt you’ve already incurred. (Another simple example: If you earn $6,000 per month and the combined total of your existing car loan, mortgage, and minimum credit card payments amount to $2,000, you have a debt-to-income ratio of 33%.)

There are other important factors as well, but these two figures form a significant part of the calculation when determining your credit score. If they’re going to offer you the best possible terms, lenders want to be relatively confident you’re able to easily afford to pay for the credit they’re offering you.

They can make that decision based, in part, on how much of your current reliable income is already going toward other debt you’ve incurred in the past, as well as how much of your available credit you’ve taken advantage of thus far.

If you already have four credit cards and they’re all maxed out, when you apply for a new credit card, it’s a pretty good bet you’re going to max that one out too. You already have a 100% credit utilization ratio.

This shows you’re probably not great at managing debt, and there’s a good chance you’ll eventually overdraw your ability to pay. So, the credit card company may decline your application, or they may offer a lower credit limit and/or a higher interest rate to help mitigate their risk.

Of course, if your income is such that, even with all those maxed-out cards, you’re having no trouble at all making the monthly payments, (your debt-to-income ratio is still low,) they may not worry about your utilization at all. And that’s where debt tends to snowball quickly and dangerously.

To sum up, here’s the tip: To improve your credit score and make sure you’re managing your debt effectively, you should shoot to maintain a credit utilization ratio and debt-to-income ratio of no more than 30%. In other words, you’re taking advantage of available credit, but you’re coming nowhere near the maximum you can afford to spend on it.

Make and Keep a Budget

This one requires very little explanation. Everyone realizes that some sort of budget is necessary if you’re going to manage your spending. The more formal your budget, the better.

If you’re currently in good shape — your credit score is high and your debt is low — a strategic budget can help keep it that way while improving important tools like emergency savings and investments.

If you’re on the other end of the spectrum — your credit score is low and/or your debt is getting out of control — a budget can be the lifeline you need to slowly but surely pull yourself out of that downward spiral one penny at a time.

The formula is very simple: Income > Expenses.

Of course, putting it into practice is a little more challenging. There are plenty of tools available, from a pile of envelopes with cash set aside for various expenses to smartphone apps, but the real value of budgeting depends on your own self-discipline and willingness to stick to the plan you create.

So, for this tip: Make a budget that consistently keeps your income above your expenses, and do everything you possibly can to stick to it.

Get Professional Help with Credit Repair If It’s Needed

While all of the above tips are self-serve actions you can take right now to make a difference in managing your debt effectively, many Americans are already in a situation where it may not be possible to turn it around completely on their own.

For instance, if the loss of a job, divorce, military deployment, or other major life events caused you to unexpectedly rely on credit cards for months, you may be in a desperate situation that isn’t really even your fault.

Likewise, if you’re like so many Americans who grew up, finished school, and left home without ever learning the basics of financial responsibility, you may have gotten in over your head in debt without even realizing that was possible.

No matter what the reason is for your current situation, you don’t have to go it alone.

Get in touch with a reputable credit repair agency and discuss your situation with a professional who can help. For a small fee, they can take the reins on your situation by:

  • Investigating your credit report to confirm its accuracy and completeness
  • Working with creditors on your behalf to negotiate payment plans or better terms
  • Disputing errors and eliminating inconsistencies on your report
  • Setting up a realistic budget and debt reduction plan
  • Guiding you through the challenges that will inevitably rise as you resolve your situation

So, the final tip is this: If you need help getting out of snowballing debt and getting yourself to the point that you can effectively manage it going forward, don’t hesitate. Get the help you need.

In modern America, completely avoiding debt is not only difficult, it’s potentially harmful. However, incurring debt without managing it effectively can be even worse. Follow the tips above, and you’re sure to get a solid handle on debt and use it skillfully.