Debt Management

Contrary to certain beliefs debt is an essential part of a developed economy. Few could afford the roof over their heads without mortgage debt, and the majority of successful businesses start life by borrowing. However, in many advanced societies, consumer debt is spiraling out of control. Much of this is fuelled by the easy availability of debt in the form of credit cards.

Stores are very good at tempting visitors into purchases they cannot afford, and the credit card further encourages the culture of “have now pay later”. The problem is that credit card interest rates are generally exorbitant, and many fall all too easily into an inescapable cycle of debt in which only minimum monthly payments are made. The balance, and hence the interest charges, soon mount up meaning – at best – the consumer pays well above the marked price for those “must have” goods. In the worst case scenario spendthrifts are forced to file for bankruptcy, often losing their homes, cars, livelihoods, families and prospects.

The key to debt management is discipline. If you’re thinking of incurring debt, can you justify the reason? If it’s to purchase a piece of real estate (as a home or investment), or to fund a business start-up or expansion, the answer is probably yes. If it’s to buy the latest car or other gadget that you’ve managed without until now but the marketers have convinced you that you simply “must have” the answer may well be no. Luxuries are not wrong, but far better to fund them on the proceeds of accumulated assets than to pay way over the asking price by buying on credit.

Credit cards are a great invention – used properly. I’ve had a credit card for years, and never paid a penny interest. I use it for convenience, and as a source of free short-term credit. But I make sure that credit remains free by settling my bills on time each month.

If you do have good reason to incur debt, make sure you are doing so in the most cost effective way. That’s rarely by credit card. Mortgage debt is secured on your home and is usually pretty cheap. Can you extend your mortgage? And if so, what is the rate? Personal loans can also be found at reasonable rates.

If you have credit card debt, try to reduce the interest being paid by moving the debt to a cheaper source. Perhaps extending your mortgage, or finding a cheaper personal loan. Some credit cards even offer interest free periods for new customers. If you can find one, take advantage. Remember, loyalty can keep you poor.

In comparing different forms of debt be sure to make your comparisons using the annual percentage rate (APR). Often the rates that appear in advertisements are manipulated to make them appear more favorable. The APR ensures that sources of credit are assessed on the same terms.