Friday, 15 April 2016

How to Manage Debt?



Debt is no longer a dirty word; most of us have debt in some form or other. Whether this debt is in the form of some loan or credit card dues it is important that all debt is managed well. If not managed well it could cause you to lose money in form of unnecessary fines and charges that might have to be paid by you, it can impact the CIBIL score and in extreme cases it could result in the borrower falling into a debt trap. If payments are missed frequently then one could find themselves on the loan defaulter list which could make getting credit in the future difficult. 

How to Manage Debt? Managing debt is not only about trying to reduce or repay your loans; it is a comprehensive view which ensures that one is in control of the situation, is prepared to deal with emergencies and is able to be credit healthy.

*      Being Aware of Your Total Debt: The first thing and the most important thing is to be aware of the total debt one has at all times. This is possible by making a credit check and getting a credit report from time to time. A Credit Information Report (CIR) lists all open loans of an individual along with other details like interest rates, grey areas if any. Being fully informed about one’s liabilities ensures that the person knows what his/her responsibilities are and how best to handle them. Also a CIR is like a brief summary of one’s credit health so it can be good indicator of one’s financial health. 

*      Timely Payments: Another factor that goes a long way in good debt management is timely payments; always! This is one thing in which being consistent goes a long way in effective debt management, helps one is saving money and also to improve cibil score. Not paying on time means that one is charged with hefty fines, interest gets accumulated on the unpaid amount and for the next month the burden increases as not only the originally due amount but fines also need to be paid. Revolving credit especially in case of credit cards is a dangerous thing. A single missed payment can add to woes of the borrower.

*      Have a Contingency Plan in Place: The best laid plans and go haywire. So whatever be the size of debt, there should be a contingency plan in place. What if one is unable to pay the dues for one month, or for a few months? In such scenario it is important to prioritize the payments, rather than not paying any installments it is better to pay at least some. Like for a credit card one could opt to pay the minimum amount due, though this will attract interest charges there will be no late payment charges or reporting to CIBIL. In case of loans, one could talk with the bankers and let them know that there would be delay of few days or maybe a month. It is also important to have a contingency fund that one can dip into in case of a job loss or some other emergency which can cause financial distress rather than having to forego the asset.

*      Keep an Eye on the Interest Rates: Interest rates keep changing with changing macro and micro economic conditions. If you have a fixed rate loan at a high interest in a market where the interest rates are soft you could explore one of the following options. You could try and renegotiate the rates with your existing lender, you could explore the option of a balance transfer keeping in mind the cost involved or look at closing the existing loan by replacing it with a fresh loan at  lower interests notwithstanding the cost involved. In case of floating rate interest you need to keep a track of change in the interests and how the lender is making the changes in your EMI or tenure.

Since debt is part of everyday life now and is not something that is frowned upon the key is to be responsible and aware borrower. One should review his/her loans, CIR and financial status from time to time so that one is not caught unawares with any situation. Debt management will ensure that you do not have to pay unnecessarily high interests, fines or are ever caught in a debt trap.

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