Debt Management: Basic Concepts And Tips

When you have some credit and use it responsibly, paying your debts on time and without using your card in full, you'll build a credit history that will give you access to credit when you need it (you might even get a better job position). Below, you will find the basic information you need to know before going into debt:

What is credit and whats is debt?

The word credit comes from “credere” means “trust" and refers to an obligation to pay at a certain time, generally to purchase items for which we do not save enough to pay for them, or for rewards or cash back on a credit card.

Other definitions include: "credit is the permission to use another's capital" (John Stuart) and "credit is the power to obtain goods and services by giving a promise to pay at a specified date in the future" (Joseph French Johnson).

Credit is simply the ability to acquire debt, and debt is money that you have already borrowed but not yet paid back. The price of a credit is the interest rate, which must also be liquidate along with the debt.

Among the various types of debt that Americans carry, mortgage debt is the most common. Other common types include student loans, credit card debt, and auto loans.

Borrow Recommendations

Whenever you request a credit or borrow, evaluate if you can pay it, knowing your ability to pay. The ability to pay debts will be equal to your income - (expenses + savings).

According to the 28/36 rule, a household should only spend 28% of its monthly income on housing expenses and no over 36% on debt service, which includes credit cards and auto debts.

Borrowing only what you can afford, also consider reading the fine print before signing, in addition to never exceeding the credit limit (your debt should equal no more than 30% of your available credit), check your credit reports often and make more than the minimum payment. If you don't pay on time, your credit history will suffer. 

A good credit score means that businesses think you are a low financial risk, and indicates that you are more likely to make payments on time than someone with a lower credit score. A good credit score will be between 300 and 850 points.

A good credit rating is key to your financial future in the United States, because a credit history will be reviewed by lessors, employers, public services and cell phone companies, and mortgage, auto, and credit card companies.

Some factors that influence your credit history are your payment history, types of credit, new credit, your use of credit, and the length of your credit history. A good credit score will allow you to get the best terms and options for obtain a new borrow. 

But there are also loans for bad credit where you can request borrow money effortlessly

What is debt management?

Debt management plans are used to reduce or eliminate unsecured debt such as credit cards and personal credits. Secured debts would be, for example, a mortgage, that's backed by property, like a car or a house.

If you're having trouble paying off unsecured debt, debt management is the best way to keep track of your bills and pay them before the due date through financial planning and budgeting.

A debt management plan will need strategies to help reduce your current debt and get you on track to eliminate it in the future.

An effective debt management strategy is the “snowball” effect, where you start by paying off the smallest debts, to stay motivated, and each time you pay off a debt, you reallocate the money you spent on that bill to pay off the next smallest debt, and so on until its elimination.

Debt elimination is a process that can take years, so staying motivated is crucial.

Other strategies, like trying to get a lower interest rate, can trigger a lengthy inquiry on your credit report that will lower your credit score for a year. If you're using your creditor's withholding tactic to get a better rate, expect your credit score to drop, too.

Jessymar Daneau Tovar (@letroupe)

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