Debt Management

What is Debt Management?

Debt management is controlling the availability, amount, and terms of borrowing money. Many of us were told from older generations that cash is king or if you can’t pay cash, you can’t afford it. That may have been a sound strategy at one point, but unrealistic now that the cost of big-ticket items such as a car, education, and house have skyrocketed relative to income.

Proper debt management can allow you to have access to credit when you need it, make wise borrowing decisions and help avoid disaster in emergencies.

Establishing Credit

Building good credit is the first steppingstone to accessing loans. To establish a credit history, you may have to start small and work your way up. That may include getting a low balance credit card and paying your billon time. To secure a first-time loan you could make a larger down payment or put-up collateral to put a lender’s mind at ease. The important thing is to establish credit and a history of timely payments.

Borrowing Options

Educating yourself on the best type of loan for your purchase can help you prevent a costly mistake. If you’re strategic with the type of debt you use to finance specific purchases, you may lower your cost of borrowing and qualify for tax benefits. For example, using a mortgage to buy a home or government subsidized loans to finance an education.

You may find other types of benefits when educating yourself, suchas a credit card rewards program that is most beneficial to you. Lending is acompetitive business, so find the best product for your situation.

Credit Reports

Credit reports are a history of your past credit relationships. Having a good credit score will help you get access to the best deals and credit offerings available. A good track record of paying your obligations is the best way to maintain a high credit score, although there are other factors as well. Errors can occur through no fault of your own, so review your reports regularly for inaccurate information and challenge it. If your credit score is low because of your personal history, it can be improved by an ongoing effort to establish and pay loans on time. It takes time, but you can build your score up.

Reduce Your Borrowing Cost

Continually review your debt, there may be options to reduce borrowing costs over time. Many homeowners refinance their mortgages when interest rates fall relative to their current rate, this could make sense in many situations. It could be advantageous to sell an asset to pay a debt and stop further finance charges or use built up home equity to cancel PMI coverage. Be aware of options to lower your cost of borrowing.

Options When You Can’t Pay Your Debt

Consider being proactive if you find yourself overextended. Some options may include increasing your income, reducing the cost of debt, renegotiating with your creditors, or maybe even working with a credit counselor or non-profit credit counselling service to arrange a more affordable repayment plan.

Conclusion

Proper debt management can be the difference between positive and negative borrowing experiences. Be sure to educate yourself and work with credit counselors so you can use debt to work towards your goals rather than against them.