Your net worth is your assets minus your liabilities. Liabilities are debts. The more debts you owe, the lower your net worth will be. Plus whenever you have debts, you also pay for the interest, that’s why you lose more.
For practical reasons, it’s understandable why people sign up for loans. Take for example, buying a car or a home, it’s hard to shell out cash here and there. That’s why debt is a tool that when used wisely can benefit the borrower. However, the borrower must comprehend that a debt is still a debt and must be paid in due time – with interest.
When people don’t manage their money well, they get in financial trouble. It’s a cycle. They run short of cash, that’s why they borrow. Then they’re not able to stick to a budget so they can’t pay the debt.
Reasons why people get into serious debt are:
- Unemployment
- High cause of medical bills
- Settling divorce finances
- Spend-aholic or could not control spending
- Wasn’t able to save
- Not in the know on financial and credit matters
When talking about health, prevention is always better than cure. That’s the same with your money, better to save for a rainy day. Here are some tips:
- Make a budget and do your best to stick to it. When it’s payday, have an amount allotted for the bills that have to be paid as soon as possible. This includes setting aside some for credit card debts.
- Save 10% of your salary for emergency. You don’t know what could happen the next day, next week or next month.
- When you have a choice of buying a purchase for a lower and practical price, then go for that one. Think, think, think before investing on something.
- If you have to borrow, research on the loan. Study the interest rate and the penalty fees. Then after borrowing, make a budget of how much you can save so that you can pay when called for.
It is common understanding that when you take out a loan, you repay the principal. The principal is the amount that you borrowed plus the interest.
You can control your credit card debt by looking at the interest rates of any loan you’re considering to sign up for before doing so. Interest rates vary and it is practical that you get one where you wouldn’t lose as much.
As much as possible, have at least one or two credit cards. Too much credit cards in your wallet can indulge you in buying something you don’t really need. You just buy it because you know you can. However, you’re not sure if you can pay off your debt when the occasion arises.
If you want to cut down on high credit card bills, you can:
- Pay cash instead
- Limit yourself on charging. Record it and do your best to not exceed that amount. You must always, always keep track.
- Choose the credit card which offers the lowest interest rate and has no annual fee.
- Just because you’re getting a free gift or a discount on a purchase, you’ll sign up for that credit card. This is their marketing strategy for possible customers.
- Most importantly, pay bills on time. This is for you to avoid late charges, plus additional interests.
Just bear this in mind: if you don’t pay on time then it would be reflected on your credit history. This could result to you having a hard time borrowing the next time. Banks and other credit lenders check your credit history before they grant your loan. Creditors look at the recent two-year history and those who have credit record that contains a lot of late payments, delinquencies or defaults may not be able to get the loan.
To put it simply, in order for you to invest, the best advice we could give is to choose the right loan.
Look for the lowest interest rate. The interest that you save can be spent on other investments.
Studies show that by increasing your monthly payments, it can shorten the payment term on your loan. The longer you wait, the higher the interest you’re paying. Besides, signing up for a shorter payment term equals less agony when it comes to coming up with the money to pay the debt.
The key is maximizing your net worth by minimizing your liabilities and maximizing your assets. Know how much you have and strategize on how you can increase it without losing much of it just to pay for debts.
Friday, February 12, 2010
A Problem Called Credit Card Debt
Credit cards are no more a luxury, they are almost a necessity. So, you would imagine a lot of people going for credit cards. In fact, a lot of people possess more than one credit card. So, the credit card industry is growing by leaps and bounds.
However, the credit card industry and credit card holders are posed with a big problem called Credit Card Debt. In order to understand what credit card debt actually means, we need to understand the workflow associated with the use of credit cards as such.
Credit cards, as the name suggests, are cards on which you can get credit i.e. make borrowings (your credit card debt). Your credit card is a representative of the credit account that you hold with the credit card supplier. Whatever payments you make using your credit card are actually your borrowings that contribute towards your credit card debt.
Your total credit card debt is the total amount you owe the credit card supplier. You must settle your credit card debt on a monthly basis. So, you receive a monthly statement or your credit card bill which shows your total credit card debt. You must pay off your credit card debt by the payment due date failing which you will incur late fee and interest charges.
However, you have the option of making a partial (minimum) payment too, in which case you don’t incur late fee but just the interest charges on your credit card debt. If you don’t pay off your credit card debt in full, the interest charges too get added to it.
So your credit card debt keeps on increasing, more so because the interest rates on credit card debt are generally higher than the interest rates on other kind of loans/borrowings. Further, the interest charges add on to your credit card debt each month to form the new balance or the new credit card debt amount.
If you continue making partial payments (or no payments) the interest charges are calculated afresh on the new credit card debt. So you end up paying interest on the last month’s interest too.
Thus your credit card debt accumulates rapidly and soon you find that what was once a relatively small credit card debt has ballooned into a big amount which you find almost impossible to pay. Moreover, if you don’t still control your spending habits, your credit card debt rises even faster. This is how the vicious circle of credit card debt works.
However, the credit card industry and credit card holders are posed with a big problem called Credit Card Debt. In order to understand what credit card debt actually means, we need to understand the workflow associated with the use of credit cards as such.
Credit cards, as the name suggests, are cards on which you can get credit i.e. make borrowings (your credit card debt). Your credit card is a representative of the credit account that you hold with the credit card supplier. Whatever payments you make using your credit card are actually your borrowings that contribute towards your credit card debt.
Your total credit card debt is the total amount you owe the credit card supplier. You must settle your credit card debt on a monthly basis. So, you receive a monthly statement or your credit card bill which shows your total credit card debt. You must pay off your credit card debt by the payment due date failing which you will incur late fee and interest charges.
However, you have the option of making a partial (minimum) payment too, in which case you don’t incur late fee but just the interest charges on your credit card debt. If you don’t pay off your credit card debt in full, the interest charges too get added to it.
So your credit card debt keeps on increasing, more so because the interest rates on credit card debt are generally higher than the interest rates on other kind of loans/borrowings. Further, the interest charges add on to your credit card debt each month to form the new balance or the new credit card debt amount.
If you continue making partial payments (or no payments) the interest charges are calculated afresh on the new credit card debt. So you end up paying interest on the last month’s interest too.
Thus your credit card debt accumulates rapidly and soon you find that what was once a relatively small credit card debt has ballooned into a big amount which you find almost impossible to pay. Moreover, if you don’t still control your spending habits, your credit card debt rises even faster. This is how the vicious circle of credit card debt works.
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