What is the best way to take charge of your debts?
The rising cost of living and dying has made us all increasingly reliant on loans and credit. Most of us have been in debt to somebody at some point in our lives. A debt is simply an obligation that needs to be repaid and accounted for no matter how small the amount.
It can be said that being in debt is normal, given that no one has a monopoly of all the money in the world. People will almost always have a tendency to accumulate debts regardless of how rich they are. In fact rich people very often have more debts than poor people because they have more perceived needs and they have more collateral or security.
Being in debt is not something that you should be ashamed of provided that you are a responsible debtor. This means the money has been used for a very good cause or purpose and the debtor is sincere in his responsibility to repay his debts.
Even a person who is very knowledgeable about financial management can get into debt for one reason or another. However, a person who is good at managing his finances should also be good at managing his debts. Managing debt includes the ability of knowing how much a person owes and from where he will get the money to repay those debts.
The ability of knowing the total indebtedness is a MUST in debt management because the person in debt must be aware of the total amount he will have to produce in order to pay off those debts. Unfortunately there are many people who do not practice good debt management. They keep borrowing money without being able to keep track of how much they already owe to individuals or to financial institutions.
Debt management means that at the time the loan was made, the borrower knows where he would find the funds for repaying that debt. This makes the debt manageable because it is clear that the borrower has a source of income and he is just not liquid at the time he borrowed the money.
People who do not have a steady income source should be discouraged from borrowing because there is a tendency for their debts to pile up without being repaid at all. Unemployed people who resort to borrow money for their essential expenses like food and daily needs may borrow from another creditor in order to pay off a debt that is already due and demandable. The same thing happens to the second and the next loans after which it becomes a horrible, vicious cycle.
A person who is in debt needs to take an inventory of his assets that can be used to pay off his debts. There is no problem if the debtor is looking at a possible income that has not yet been paid. Such unpaid income can be considered an asset which can be used to pay the debts.
Debts are easily made but they are very often difficult to repay. Therefore we all need to be careful when borrowing money from others. Make sure you have something to pay for the debt like an incoming salary or check, or assets that can be sold to pay off the debt.
Some people get into debt because of loans that have varying interest rates. This means that in addition to the principal amount borrowed, the debtor still has to pay the accumulated interest. A person who borrows $100 at 10% interest rate per month will have to repay the principal plus the interest rate of $10 per month. Some interest rates are based on the actual balance, e.g. if the debtor has already paid $20, then the interest rates would only be fixed on the balance of $80. However, there are some interest rates fixed at the original amount borrowed.
While being in debt is common, each of us should learn how to manage debt and how to stay out of debt if at all possible. One of the major reasons why most Americans are in debt today is because of the misuse of credit cards.
Credit cards are those pieces of plastic that can so easily be used to pay for almost anything, even if you don't have the cash behind it. People find it easier to spend when using their credit cards because they just swipe it and there you are! - it works like the proverbial genie granting their every wish!
However, most people who do not use their credit cards wisely get into debt and are then faced with legal actions for failing to repay their credit card debts when they become due.
Go ahead, borrow if you must, but always take charge of your debts to ensure that they don't lead you to declaring insolvency or bankruptcy.
Click here for the next step in your debt relief guide which focuses on creating a budget.