Debt Solutions

Wise credit management still falls back to fundamentals.  Know the difference between the good and bad debt.  Understand the difference between needs and wants. 

The principle of sound utilization of credit remains the same; if debt is used to fund consumptive behavior, it will destroy lives.  However, if it is used to build a business or buy appreciating assets, it can be a heaven-sent boon. 

If you can hardly get by because you own two or three cars, that is bad.  But if you can hardly get by because you own three homes, you can simply sell off one house.  For credit card holders, identify the purpose of your card and be focused.  If it is for payment purposes so that you don't have to carry so much cash around, that is fine.  It could also be for emergencies; for instance, if your loved one or your dependent is hospitalized and you need a large amount quickly.  On the other hand, if it is to buy items that you can't afford, then you need to assess your spending habits. 

Another aspect you must consider is how much it's costing you  and that does not just refer to how much your monthly payments are.  Consumers need to understand the cost of credit.  Say, a hire purchase loan interest rate is often promoted on a fixed and no-rest basis; thus, as a rule of thumb, in order to obtain the true effective annual rate, you need to double the promoted rate and add one to it [(Promoted rate x 2) + 1].  If consumers were more aware of the charges they're paying, they would be more careful about the credit they're taking on. 

To avoid being swayed by temptation and overspending on the little things, you should have your ultimate goal in mind.  Ask yourself; "What is my life goal?" maybe it's to own a home worth x dollar in three years, or perhaps, if you're married and have kids, it is to build a good education fund for your children.  When you have a goal in mind and are focused, whatever comes along to tempt you doesn't enter the picture so easily. 

Today, consumers are often bombarded by huge advertisements, leaflets or telemarketers encouraging them to tale on more credit, whether it is a cash advance, a housing loan refinancing package or a personal loan.  How do you rationalize your thoughts in the midst of such aggressive marketing?  Ask yourself three questions; "What's in it for the bank?", "Why am I being made this offer?", "What's in it for me?" Well, what's good for the bank is not necessarily good for you. 

If you take on a loan, you are spending out of future income.  Thus, it is wise to project into the future, to consider things that could happen; possibilities that could include a loss of employment or a family emergency. 

Many consumers are like rubber bands; they are really stretching their finances.  Some consumers live so dangerously on the edge of financial disaster that a few months of unemployment or emergency is all that it takes to push them over. 

When you swipe the card a few times a month, you tend to loose track of the figure you have spent so far.  Thus, always keep track of your spending and how deeply in debt you are.  One way is to look at the Debt Service Ratio; the ratio of total debts versus total income.  This should be below 35%.  If your car and housing loans already hit 35%, you are already pushed to the limit. 

You can also check on your Debt Assets Ratio; total debts versus total assets.  It is a broader measure of liquidity.  If your income can't satisfy your debts, can your assets do so? 

Watch out for the warning signs that you may be in too deep.  If you always have to look for extra money, borrow from friends, juggle your payments or transfer credit card balances, look into personal loans or even tighten your belt to make ends meet, you're definitely overstretched.