To build wealth and focus on important financial goals, you need to trim down and ultimately eliminate debt. These debt management tips will help you stay in control of your money.
Developing the discipline and motivation to get out of debt will enable you to focus on becoming financially secure. Debt keeps you from making the most of your money, which is why it is critical to know how to manage it.
Here are some pointers to help you stay on track:
- How bad debt negatively impacts you
The more money you owe, the less likely it is that you will be able to repay your debt. Too much borrowing can quickly trap you in a debt spiral that is difficult to escape from.
Skipping payments or paying your credit card late will negatively impact your credit score, making it unlikely that you will get approval for big ticket items like a home loan. Moreover, a bad credit record can have a negative impact on your professional life, making it difficult for you to find a job.
What is a credit score?
Your Credit Bureau Score is calculated through a formula determining your ability to pay your bills, the amount of debt you carry and how it compares with other borrowers.
This single number on your credit report indicates your capacity to manage existing credit. Generally, the higher your score, the better.
- How your credit score affects you
Restricted access to future credit on a personal level means that important loan facilities such as vehicle finance, a home loan, overdrafts and credit facilities like credit cards will no longer be made available to you because you are classified as a risky borrower.
Many companies run credit checks on applicants for new positions, so your job prospects can also be affected by a negative credit score.
If you are a business owner, poor personal credit scores can affect your ability to secure loans for the business or favorable payment terms from suppliers.
Reasons for over-indebtedness
There are several reasons why we are failing to manage our debt responsibly:
- Loss of employment or income if you are retrenched or your business closes down
- Reckless lenders providing credit to individuals who are unable to pay it back.
- Living beyond your means as the cost of living rises
- Irrational and impulsive spending.
- When is debt good?
Good debt is money that you borrow in order to make more money. It is the type of debt that builds wealth over the long term, leaving you better off than you were.
Think of it as an investment that will grow in value or generate long-term income, such as a student loan (which will help you earn a better income in the long run), or a home loan (which will give you ownership of a property that is likely to increase in value over the years).
Good debt tends to be incurred when buying items of high value, such as a home or a car, with credit making these types of purchases easier to afford as they can be paid off. Remember that Home Loans and Vehicle Finance are more likely to be approved if you have a good track record of paying creditors on time, every time.
To build and maintain a good credit record, manage your accounts and ensure that you pay the entire instalment amount due on time every month.