Debt management for beginners: the ultimate guide to managing debts effectively

Debts are commonly associated with a negative connotation. While it’s ideal to clear your debts, you don’t need to stay away from them entirely. Some debts can help you work towards certain goals, such as buying your first home.

On the flip side, there are also other types of debts that can reflect poorly on your credit profile. For instance, having a bad credit score due to high-interest credit card balances. If you’re feeling lost on how to plan your finances, here are a few debt management tips to keep in mind.

What are the different types of debt available?

Before we get into our tips on how to manage your debts, let’s first distinguish between good and bad types of debt.

Good debt

Any debt that helps support long-term financial growth can often be viewed positively. These are some examples.

Mortgages

Working towards paying off your home loan establishes security and stability. A house generally appreciates in value over time. By taking a mortgage to pay for a house, it creates equity as you lower the principal when you pay down the loan.

Student loans

Education is often viewed as a strategic investment because higher academic qualifications typically correlate with increased earning power. The long-term return on investment (ROI) from a degree often far exceeds the initial cost of tuition. Hence, by opening doors to a broader array of career paths, student loans are generally classified as good debt.

Business loans

Business loans offer the essential capital needed to scale operations, from purchasing equipment to expanding teams. Unlike personal debt, these loans are strategic investments designed to generate a return higher than the cost of borrowing. This allows a company to grow and increase revenue without the founder having to give up equity in the business.

Bad debt

Bad debts refer to borrowed money used to buy depreciating assets or for non-essential expenses that don’t hold any long-term financial benefits.

Credit card loans

Credit cards often end up being used for “wants” rather than “needs.” If Confessions of a Shopaholic taught us anything, it’s that funding a lifestyle through consumer debt is a recipe for disaster. The bottom line? If the cash isn’t in your bank account, avoid swiping the card. Some credit card interest rates can soar up to 20%, making a small luxury quickly snowball into a massive, unmanageable debt trap.

High-interest loans

High-interest loans feature compounding interest and can become increasingly difficult to settle over time. They are best reserved strictly for genuine financial emergencies rather than routine expenses. To avoid a debt spiral, these high-cost borrowing options should be used only as a last resort.

Best tips for managing debts and reducing your balances

If you’ve got some debts to pay off but don’t know how to manage them, here are a few tips to keep in mind.

Plan a budget

Firstly, find out the total amount that you owe and compare it to how much you’re earning and spending. You can start by making a list of all your bills, loans, and monthly expenses. From this list, assess the priority of each item and adjust your spending accordingly.

Then, identify the interest rates, payment due dates, and outstanding balance, and determine which debts impact your budget the most.

Decide how to settle your debts

There are two primary frameworks for debt management: the Snowball Method and the Avalanche Method.

The Snowball Method focuses on momentum by targeting the smallest balances first, regardless of interest rates. Once the smallest debt is eliminated, you roll that payment into the next smallest.

In contrast, the Avalanche Method prioritises interest costs. With this method, you aggressively pay down the debt with the highest interest rate first while maintaining minimum payments on others, ensuring you pay the least possible amount of interest over time.

Consider debt consolidation

Keeping track of multiple debts with varying interest rates can be tricky. If you’re struggling to make timely payments for each debt, you can consider applying for a loan to consolidate all your debts into a single loan. Debt consolidation may be easier to manage as you’ll only need to make one repayment rather than making several payments.

Pay on time

Paying your bills on time is essential for building a strong credit history. By avoiding late payments, you skip the headache of penalty fees and prevent your interest rates from climbing even higher. It’s the simplest strategy for keeping your credit score healthy and your repayment costs low.

Avoid getting into new debts

Don’t let new debt cancel out your progress. While you’re in repayment mode, limit credit usage and stick to cash or e-wallets for your daily needs. Using your own funds instead of borrowed credit is the best way to keep your spending under control and ensure you stay within your monthly budget.

How to use TNG eWallet for debt management

To manage your debts effectively as a beginner, set aside your repayment funds in schedule to easily pay your bills online. This keeps your money organised and ready for auto-deductions while earning you daily interest, ensuring you never miss a deadline.

Periodically check your credit score on CTOS within TNG eWallet to ensure your score is healthy and your credit usage is below 30% of your available limit.

If you’re looking to apply for a debt consolidation loan, you can do so through CashLoan. Interest rates start from 4.99% and you can loan between RM100 to RM150,000 with a loan duration from 1 week to 7 years. The application process is entirely digital, and you can get your loan approved as quickly as 24 hours, subject to eligibility.

Learn how to manage your debts wisely

At the end of the day, debt management boils down to awareness and action. From planning a strict budget to consolidating high-interest loans, these strategies provide a roadmap to help you manage your debts wisely. Start by listing your debts and picking one method to tackle them. You can also try these 5 gamified saving challenges to maximise your savings in a fun way.

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