Debt and Credit

Debt and Credit Card

Americans seem happy with debt up to a point. Certainly some of the figures on debt are quite alarming and when taken together with the lack of saving point to households that are ill-prepared for the future. Debt does not go away without positive action; if you have been wondering how to get your finances in better order then it begins with a budget containing all your financial information, current debts, income and expenditure and determination to act.

Credit Cards

Prior to the recession every credit card company followed an aggressive marketing strategy to increase their number of customers. It was a period of easy credit that the Collateralized Debt Obligation (CDO) crisis brought to an end. The recession has gone yet the signs are that there is still a fairly relaxed attitude to credit card debt that incurs a high rate of interest at the end of every month.

There is a great deal of revolving credit card debt but a closer look at those people carrying fairly permanent balances shows the average debt at over $15,000. Companies require a monthly minimum and if they get that they are happy; their income comes from these interest rate charges. The problem is that paying the minimum will hardly reduce the balance. In the end users reach their credit limits will little room for maneuver.

No one would suggest that you pay up and close the account because your credit score takes into account your available credit. However what about taking out a personal loan at a lower rate of interest, paying the balance off and keeping the card for future use? If it appears that the applicant will be able to meet the monthly instalment commitments he or she will be taking on for the full term of the loan then a quick and positive decision is likely.

On Time

In some ways the worst debt that you can have is that you cannot pay in time. If you are late with the minimum payment a credit card company requires you will face a charge. If you are late with your mortgage there could be serious consequences so you need to think about your various debts and prioritize them:

  • Student Loan
  • Credit Card
  • Auto Loan
  • Mortgage
  • Taxes

These are the common financial commitments that many households face. If you are late with a payment that is likely to impact negatively on your credit score which is an indicator to a potential lender of your credit worthiness. At times your score can even be a factor that a potential employer will use as part of a recruitment and interview process. Certainly no mortgage lender will approve realistic loans without reference to your credit score so that must always be in your mind.

An important thing to remember is that you should face up to potential problems. You will likely get a sympathetic hearing from lenders as long as you are prepared to talk to them.

Credit Score

Even if you are making progress in settling your debts that does not automatically mean that your score will rise. If your meet your commitments on time that will see you progress. For example if you can get a personal loan to pay off your credit card balance, you will slowly improve your score by:

  • Having more available credit available that you are not utilizing. A ratio of 30% is good, owing $3,000 but having a total of $10,000 available.
  • Paying the monthly instalments on your new loan on time. Improvements may be slow but things will be going in the right direction. Personal Goals

If you are carrying student loans and you are up to date, there is no reason to prioritize paying it off in full because the interest rate charged will be low. If you have a target date for becoming debt-free then you can divide the outstanding amount by the number of months until your target date and that is what you must find every month from that point.

If you have an auto loan you must decide whether you are simply going to start another one when it is paid off, changing your car then. It surely does not make sense to be living with a permanent auto loan if your finances are not in good shape? Modern day cars are built to last so keep them a little bit longer and forget about trying to impress others unnecessarily.

Affordability

Your budget should tell you exactly where you stand and what leeway you have. This calculation will be dependent on a number of factors:

  • Have you any scope to increase your income? That may be a part-time or seasonal job or even finding ways to make money in your spare time. Many people are doing that on the Internet.
  • Can you re-negotiate with any of your creditors to get a reduced interest rate or even a reduction of your debt?
  • Have you done any research into whether you have the most competitive telephone, insurance and utility supplier? There are comparative websites that will do much of the groundwork for you.
  • Are there any other economies you can make in your daily life?

There is a way out of debt with determination and self-discipline and it is a path that everyone in trouble should take.