How to manage your credit

Credit is an integral part of our modern economy, and as such it has both its advantages and its disadvantages. It is important to weigh all of the factors involved before making a decision to use credit. If the potential downside is not considered, you might find yourself wishing in the future that you had not incurred the debt.
In general, think before you buy – is it for a want or a need? We all need food, clothing, shelter and transportation, but beyond the basics much of what we acquire is really for wants, not needs. Also, in this day of uncertain employment, it always makes sense to live on a bit less than you have coming in, rather than borrowing on the assumption that next month or next year will be better.

What about if I want to finance purchases?

If you do decide to finance a purchase, shop around for the best interest rate, make the largest down payment you can, and be sure that you know about all hidden charges, interest costs, late payment penalties etc., before signing on the dotted line. And ask who holds the financing – many consumers have been surprised to learn after arranging a purchase that they will be dealing with a finance company when it comes time to pay.

Many retailers focus on the “low monthly payments” instead of the interest rates being charged on financing promotions, and they don’t want you to know the total cost of buying with credit. Just out of interest, ask the total cost of the monthly payments over the life of the contract, and compare that to the cost of paying cash today. You’ll be surprised!

Some Tips while Shopping

Try not to use credit for something which won’t last until the bill arrives. It’s one thing to have a credit card bill for a stereo or a new suit which you’ll enjoy for several years. It’s another thing to have to pay for a restaurant meal, groceries or cigarettes you enjoyed three weeks ago.

Keep track of all credit purchases in one book, and consider how they impact your monthly budget. If you are using a credit card, try to pay it off in full at month-end to avoid interest charges, and treat any purchases like cash transactions with respect to your record-keeping. If you are borrowing for a larger item such as a car or furniture, look at how the monthly payments fit into your budget.

A good guideline to remember is that non-mortgage debt payments should be no more than 10-15% of your regular take-home pay each month. A higher percentage can be an indication of trouble on the horizon.

Considering a Consolidation Loan?

Consolidation loans are useful under certain conditions – but only if the original sources of credit which are being consolidated are closed. A consolidation loan which pays off credit card balances but does not close the credit card accounts is a ticking time bomb, because now the capacity to incur debt is greater than ever.

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