DebtPersonal Finance

Get Out Of The Red And Into The Black

Get Out of the Red and Into the Black

Debt is like an avalanche that grows stronger with every monthly statement.

It begins to accrue whenever expenditures exceed income and we have to borrow to make payments. Most of the time, we are allocated credit facilities that allow us to pile on the debt.

These ‘resources’ include credit cards, automobile loans, mortgages, student loans and even personal loans. However, just because we have been granted credit facilities doesn’t mean that they cannot be effectively managed.

Nowadays, most everyone has access to credit of one kind or another. Credit usually takes the form of credit cards, or store credit cards like Kohls, Macy’s, Bloomingdales, and scores of others.

Easy access to someone else’s money is an enticing proposition to everyone. But it should be remembered that credit is not somebody else’s money – it’s your money + interest.

Of course, those who default on their credit repayments end up in debt. It may not be criminal, but it is certainly going to adversely affect your life if you cannot make the repayments.

The first thing to go is your credibility. The second thing to go is your credit score, and that automatically reduces your ability to access favourable interest rates from credit card providers, loan companies, banks, and the like.

Credit Allows Us to Live the Life We Want to Live

Get Out of the Red and Into the Black

The problem with racking up debt is that it is so easy to do. Earning money to pay off debt is always infinitely more difficult than spending money.

It’s the economic conundrum: Our wants always exceed our means, and it’s what keeps the economy going. Most people don’t have the money to pay for their university education upfront, to buy their first car for cash, to pay for their house in full, or to prepay an exotic vacation with the family.

So, we borrow and accumulate debt in the process, that’s all good and well, provided we have a plan to repay the debt and live within our means.

Debt begins to mount when we lose our ability to repay our credit card and interest repayments keep building. Fortunately, many credit facilities are flexible.

Clients are advised to repay high-interest credit cards as quickly as possible, since these can take years to pay down.

Limited Credit Card Debt Can Become Higher Personal Disposable Income

Get Out of the Red and Into the Black

Consider for a moment that people with good credit typically pay around 12% in annual interest charges, but those with marginal credit could be paying as high as 20%, or more.

Clients are cautioned against defaulting on credit card debt, because that’s when interest repayments can rise well above 24%. Car loans, personal loans, and home mortgages are currently priced around 4% significantly less than the interest on credit cards.

Another important point to remember about credit card debt is that it is not tax-deductible. This automatically makes it a more expensive option than other forms of loans.

For example, if your credit card is maxed out at £10,000, your interest repayments alone translate into £200 per month. That is £2,400 per annum in credit card interest charges.

That does nothing for the principle amount outstanding. It is easy to see how a lack of control over available credit can create financial tension.

Some people react to reaching their credit limits by applying for a higher credit limit, or opening additional lines of credit. The best way to get out of debt is to stop spending more than you’re taking in.

Consolidate all credit card debts into a manageable repayment plan by starting with the most expensive debt and working your way down.

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