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Want To Make A Smart Debt Move? Ask These Two Questions First

choosing between good and bad creditMaking smart debt choices is the best way for us to learn our lessons after the last recession. While some think that the ideal solution is to completely eliminate debt from our lives, this is not always the best scenario for everyone. For most Americans, we still need the financial boost that debt can provide in order for us to propel our wealth to greater heights. We have mentioned it again and again – the concept of credit is not really the problem. It is our inability to implement proper credit management that put us through financial hell in the past few years.

According to Bloomberg.com, consumer debt in the last quarter declined for the first time in the past 12 months. This is caused by the decrease in new mortgage loans that is at its lowest since 2000. The data coming from the Federal Reserve Bank of New York mentioned that the household debt of Americans dipped by 0.2%. This is equivalent to $18 billion. That means from January to March, consumers were able to put the total consumer debt to $11.63 trillion. It is still a big amount but at least it is going down. The only loans that are increasing at this moment are the student loans and auto loans.

These data does not really show if we are making smart debt choices already. While the American debt crisis is improving, it is definitely far from over. We need to continue pursuing better financial and credit management habits, lest we fall into the same debt pit – or more accurately, dig ourselves deeper into the one we are currently in.

2 questions to ask before making a debt decision

Since debt elimination is not the solution to improve our financial situation, it is obvious that we need to make sure that we can making smart debt moves instead. A lot of people are still skeptical as to whether there is such a thing as good debt. Believe it or not, there is. It might be tough to consider debt as a good one because we have gone through so much trouble because of it. But like what we said, debt itself is not the problem. It is the consumer habits behind that debt that led to our financial crisis.

If you believe that there is such a thing as a good debt, how can you ensure that you are choosing the right one? How does one determine if they are getting a smart debt choice or not?

There are two important questions that you need to answer.

Is the need for debt temporary or is it a permanent requirement for your lifestyle?

This is the first question that you need to ask yourself. What is this debt being used for? When your debt is only a temporary need that will help you improve your lifestyle, then that can be considered as a good credit investment. But if this particular credit is something that you will need to make every now and then to support a lifestyle upgrade, then this is clearly a bad debt. Going through with this loan is not a smart debt decision.

For instance, if you are getting the loan to finance a home that you want to buy, that can be considered as a good debt – as long as you are borrowing an amount that you can afford to pay off. But if you are borrowing money to finance a luxury car and you need to keep on using your credit card to finance the gas and maintenance costs, then that is not a good debt.

It is just like making a business loan. This type of debt can go both ways. If your business loan is a one time loan that will help you make profit, then that is a good debt. But if you are forced to keep on borrowing money to pay for the overhead expenses of the company, then this is already a bad debt. You need to reconsider your business before you take on more debt for it.

Make sure that the debt that you will borrow has a timeline. If you can see an end to your debt payments, then that is credit that you can take. But if there is no definite end to the debt payment, then you may want to rethink the need for that loan.

Will reason for the debt be worth the time and amount it will take to pay it back?

Debt, when you let it grow is powerful enough to control what your future will be like. You do not want it to have this power over your life. So before you take on that mortgage or that student loan, ask yourself first: will homeownership be worth being in debt for the next 30 years? Can you live with the thought that for 3 decades, your lender will be getting a portion of your income? For that luxury car, do you think driving in a flashy vehicle is worth making your creditors rich? After all, the interest rate you will be adding to the amount you borrowed is making banks and lenders rich.

According to an article published on TIME.com, 5 years after the Great Recession, banks are reaping in record profits. The report coming from Wall Street Journal revealed that banks earned $40.24 billion from April to June of 2014. The data also revealed that the profits of these banks are not coming from trading – but more on the interest of the loans they are distributing to the consumers. Both commercial and consumer lending rose by 13% and 6% respectively.

If you want to pass on your hard earned income to the bank via the interest of your loan, then go ahead with the debt. But if not, then you may want to find more reason to make your debt more worthwhile.

Answer these two questions and you should be able to identify if you are making a smart debt choice.

How making smart credit choices can affect your future

Debt will always be one of the major financial decisions that you have to make – regardless of the amount. Do not belittle the small credit purchases you make through your credit card because that will accumulate over time.

To help you make the right decision, here are some tips that you can follow.

  • Know your current finances first. It is important for you to understand just how strong your financial situation is. Make sure that your money can sustain the additional burden that this new loan will bring to your budget.
  • Strike a balance between your current and future finances. More accurately, you want to balance your financial situation today against a conservative expectation of your future earnings. It is not right that you only consider your present income. What if your future income decreases? How can you afford to pay it off? According to the Report on the Economic Well-Beaing of US Households released by the FederalReserve.gov in the, 16% of the participants expected their income to decline. If this is the same as your sentiment, make sure you will not maximize the amount of money that you will borrow if it is based on your current income.
  • Create a payment plan. The only way for you to determine if you can afford to pay off your debt is by creating a payment plan. Before you proceed with the loan, check if the payment plan is something that you can live with.
  • Make sure you are getting a good debt. The last tip that we have for you to make a smart debt move is to answer the two questions mentioned above. If the debt is only temporary and you think it is worth it, then what you are about to borrow is a good debt.

Important Credit Decisions For The New Year

debt and associated wordsThe first month of the year gives us time to ponder and reflect on the choices taken, credit decisions acted on and even options waited out. It gives us a chance to learn from mistakes made, apply best practices and even try something new for the year. The most important thing is to know which practices need to be avoided to prevent credit problems to pile up.

With this, the practical first step is an audit – literally and figuratively. Taking a close look at the past year’s financial data is essential in determining credit health as the new year closes in. How much debt is still owed, how much has been paid over the year and even the interest rates. Something to ponder on as well is the attitude we developed towards debt. Do we regard it simply as a monthly payment needed to be made or a ball and chain that prevents us from living a debt-free life?

Make smarter debt choices in 2014

Perhaps one of the more exciting developments for the coming year is the new mortgage law that will be taking effect. As a Reuters.com article explained, the new mortgage law calls for careful and thorough pre-assessment of loan applications. This is geared towards ensuring that the borrower has the ability to pay back the loan. If one of your intended credit decisions in 2014 is a home loan, you have to ensure that you can qualify for this.

To be enforced by the Consumer Financial Protection Bureau, rolling this out at the start of the year is already in place with creditors. As with most new laws, discussions are still in the air about some areas that could be affected with the implementation – one of which are minority group borrowings.  But the bureau is intent on upholding the ability-to-pay assessment without foregoing the rights covered by fair-lending law.

As a consumer, this law is our shield against loans we feel we can repay but in actuality, we cannot. There maybe some financial areas we need to consider like getting rid of credit card debt or lowering some payables first before applying for a new loan. Whatever it is, the new mortgage law is our second set of eyes every time we apply for a loan.

Tips to improve your credit standing this year

For the coming year, here are some tips in improving credit standing so you can make better credit decisions. An improved credit rating opens up financial options for you for your credit needs, offers better interest rates for taking out loans and even improves your chances of getting a loan even with the new mortgage loan.

Pay off a credit card. One quick way to improve your score is to pay off a card or two. You can opt to pay off the one with the smallest balance, making it easier to pay it off. You can also plan to  pay off that card that has been crippling you with a high interest rate. It will save you money down the line. Or better yet, look at your cards and pay off that one that is least used. You are better off focusing on cards that you use.

Shop around for a card. Choosing your credit card is one of the first few credit card decisions that you have to make. The credit card industry is a competitive arena and this spells good news for those looking for new cards. The aggressive competition drives down rates and drives up perks that you can easily replace your existing cards with new ones. The idea is to study carefully that cards you are considering before jumping in to a new boat.

Use priority cards periodically. There is always a card or two that is important to us. It may be the one we use for the business when taking out a loan is not an option, or that card we have accumulated a lot of points off from previous purchases. Whatever it is, use them from time to time to prevent dormant fees or closing the card entirely.

Make on-time payment. Nothing beats paying on the dot except paying earlier than the due date and putting in more than the minimum amount. But nevertheless, remember never to forget paying on time. It prevents additional charges, fees and interests that comes bundled up with late payments. It puts a blemish on your credit standing as well reflecting your inability to pay on time.

Be proactive. Monitoring your account is as much as your responsibility as it is your creditor. Especially with the recent security breach at Target. As they released in Target.com news, the PIN numbers were taken but in its encrypted state and the key is on a separate system. Even then, we need to closely monitor our accounts and make it a practice to study carefully the charges on our card.

Know the loans you need. Never apply for a loan just because your feel like it. There always has to be a valid reason before affixing your signature above that dotted line. Think twice and smart on loan applications. Useless loans that build up your payment requirement over time has a negative effect on your credit score because you will surely struggle in meeting the payment every month.

Build-up your emergency fund. Over time and due to the complexity of finances, there are different opinions on how many months your emergency fund needs to last. One thing is certain, you need to build the fund to support you through trying times. Unemployment can now reach and average of 9 months so it is practical to build up your fund for not less than 9 months. But do not stop at 9 months, continue at it as much as you can.

Monitor your credit limit. As you use your card, credit card companies increase your credit limit as a way of thanking you for using the card. It is also given to those that pay their cards on time. With this, it is wise to know what your credit limit is to prevent from overcharging against your card. It is a good practice to keep charges well under your limit to have a manageable monthly payment amount. Being able to meet payments improves your credit standing.

Know the good debts that can make you prosper

Saving up money is a great objective for the year but there are certain types of debt that, if used properly, can improve your way of life. By making the right credit decisions, you could keep yourself from turning a potentially good debt into a bad one.

Student loans. Ken IIgunas is a Duke grad student who went to extreme measures in trying to eliminate his student loans as reported by Yahoo.com. This included living in a van and using his gym membership to take showers. But Ken is more of an exception rather than the rule. He saw student loans as an immediate debt he needed to repay in order to graduate debt free, and he did. But for most, student loans are inevitable as you pursue the formal education needed to reach your dreams.

Business loans. This type of loan is acceptable because you are trying to start a business with the objective of making more money. With this, the loan is just a stepping stone in putting up that business which can improve the financial standing of you and your family.

Mortgage loans. It is every American’s dream to own a home. And waiting for the time when you have enough to buy one just doesn’t work for everyone, especially for those earning minimum wage. Taking out a home loan is one way to get that dream house now and put focus on your monthly income. It forces you to mature enough financially and prioritize the house payments before all other unimportant expenses.

As 2014 unfolds, there are steps that we can take to re-assess how we performed the past year and credit decisions we can make for this coming year to improve our way of life. With that objective, the positive effects ripple out not only to ourselves and our family but our community as well.

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