Wednesday, October 01, 2014

Understanding Debt

What is debt? Debt means what you owe. It is something you borrow from a person, lending institution or a company, particularly a bank, for whatever purpose. Mostly, we borrow money from another person because we badly need it – like paying our electric bills, water bills and others. In terms of a bigger amount needed, we borrow money from a lending company at a certain interest and is payable either daily or monthly. We can also lend money from banks through their personal and commercial loans.

Today, most banks already offer credit cards – these are facilities that allow a person to purchase items based on credit, with repayments ranging from one month to a couple of years. All of us come face to face with the allure of debt, particularly consumer debt like credit card debt, salary loan, car loan, housing loan and other personal loans. Credit though, is good at times, especially when used as leverage to earn more assets. However, when misused or abused, debt will surely cause trouble and is a death to those who mismanage it. Debt problems, as in the case of credit cards, seem harmless at first. This is because, credit card companies give a pre-approved credit and annual membership fees for the first year waived. Primarily, we think of subscribing for a credit card for “emergency” purchases. However, this does not what happens most. Like for example, you wander through the mall and find out that they are having a sale to most of their items. And here you are, bringing the credit card with you, and so you are tempted to buy many items using your credit card. This comes with the thought of paying off the whole amount as soon as the bill arrives.

However, before you know it, you would have racked up so many charges that you can only afford to pay the minimum amount. And here, the debt problem arises because aside from your purchased amount, you are being charged a very high interest for not paying the full amount. If you are already encountering this debt problem, it is already time for you to think of better solutions to pay off your bill. You may borrow from your relatives or friends at concessional rates, if not, without interest at all. You may sell some of your assets that you no longer need or use and pay the proceeds to your debts. If not, you may also consolidate your debt in one lender that charges the lowest interest. After you’ve zeroed your debt, stay debt free. The best way for this is to avoid temptations and occasions of spending. Like for example, visit malls frequently, and if not, leave your credit cards at home. Managing debt is therefore, very important. You should take it as trying to lose weight. The first step is to see how much you currently weigh – that is, you should know how much you owe and what kind of debt you need to pay. The simple reason for this is that you need to know if you have enough cash to pay for a certain debt when it falls due. In addition to classifying your debt according to maturity, you should also take a good look at them to identify, which are necessary and, which are not. Moreover, you should “cost” your debt to see, which have very high interest rates.

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