Managing Debt and Credit

Today I am going to talk about Managing Debt and Credit. First, we need to understand the meaning of CREDIT. it is defined as: the granting of a loan and the creation of debt. It is any form of deferred payment. Now lets extract this meaning and put it in to understandable terms. Basically, what this means is a bank, loan company etc... loans you money. This creates the debit that you agree to pay back on a weekly, semi monthly or monthly basis.This is known as a loan agreement or contract with specific terms and conditions regarding the repayment of the loan. This makes the loan as a deferred agreement between yourself and the bank. Before you sign any contract you need to make sure you have read all the terms and conditions of the contract to verify you understand how the loan has to be repaid. And, what happens if you default on your promise to pay.

Our modern society of instant credit has created a vast credit card debit for millions of people. Many have charged thousands of dollars on credit cards that has put them in a debtors prison. Unfortunately, once you reach this point you have exhausted all your resources of credit and backed yourself in a corner that is truly hard to recover from. If you are at this point you may need to consult with a financial ad visor or attorney to help relieve or negotiate this debit. You must use credit wisely as this helps establish creditability of your financial responsibility over time.

Lets touch on using credit wisely, First you need to determine how much you are paying on your credit cards and loans. Most loans are installment contracts meaning you make a set monthly payment at a set amount normally at a interest rate of 5 to 10 percent. These type loans are usually found on automobiles, mortgages and installment type loans. Credit cards are revolving loans and tend to charge a higher interest rate than installment loans. Typically from 15 to 30 percent interest, By making the normal monthly payment on a installment loan typically you will pay this contract out in 48 to 60 months. With credit card monthly minimum payments, this will prolong paying off the balance for up to 360 months. This in return cost you a large amount of money (interest) over the period of repayment. In the graph below this will establish a visual of just how costly credit cards verses installment loans can be.

Installment Loan- $2,500
Interest Rate - 10%
Years to Repay- 48 months
Interest Cost - $544

Credit Card - $2,500
Interest Rate - 18.5%
Years to Repay- 360 months (30 years
Interest Cost - $6,500

Your total cost of the installment loan over the 48 month period is $3044.00. The amount of interest is very low. The total cost of using your credit card borrowing the same amount of money at a higher interest rate with a longer revolving term of 360 months cost you a whopping $9000.00. The majority of this repayment is interest ($6500.00) I will tell you this, your bank is very happy that you payed them $6500 just for loaning you $2500.00. Remember, if you are maxing your credit card out this will in return lower your credit score up to 45 points, thus reducing your ability to obtain new credit at a lower interest rate. The rule of thumb is to only use 25% of the line of credit on your credit card.

In close it is of grave importance to pay down the amount of your credit card debit. Not only do you need to rethink paying only a monthly minimum payment but paying more each month until you achieve paying these high interest rate cards down or off.

Money Guy