Managing Debt

What Is Debt?

Debt is an amount of money that someone borrows and has to repay later on. Different types of debt include good debt, bad debt, secured debt, unsecured debt, short-term debt and long-term debt. The key to managing debt is awareness. You will have an advantage if you know your debt limit and are aware of common debt traps. You gain more control when you manage your money properly.

Borrowing Tips

The less you borrow, the less you have to pay back.
Prioritize needs over wants.
Control impulse spending to avoid spending more than you can afford.
Save for emergencies so you don’t need to rely on credit.

Borrowing Considerations

Career Choice

Ensure that your future career will allow you to pay off your loans.

Loan Payments

Ensure that you are able to afford your monthly loan payments.

Basic Needs

Only borrow the amount you need.

On Time Payments

Understand that it is your responsibility to pay your loans on time.

Setting Debt Limits

Use your debt-to-income ratio to see how much is safe for you to borrow. Your debt-to-income ratio is the percent of your gross monthly income used to pay your debts. Use this formula to calculate your debt-to-income ratio:

Total Monthly Debt Payments ÷ Gross Monthly Income = Debt-to-Income Ratio

Use this calculation to set your limits:

Your monthly debt payments should not exceed 15% of your gross monthly income.
If you have a housing payment, it should not exceed 21% of your gross monthly income.
Your total monthly debt payments combined with your housing payment should not exceed 36% of your gross income.

Recognize Debt Distress

If you find yourself unable to pay your debt, contact your creditors immediately. Explain your financial situation and they may be able to arrange a more manageable repayment plan for you. They will work with you, but you need to reach out and ask for help. These are some signs that you are in debt distress:

Borrowing money to pay bills.
Taking on more debt to pay off previous debt.
Using credit more frequently over time.
Frequently paying bills late.
Using credit cards to cover living expenses.
Frequently making the bare minimum payment.
Deciding which bills to pay now and which to postpone.
Using savings to pay bills.

Practice Good Financial Habits

It's crucial to stay aware of your debt by regularly monitoring what you owe. Remember that accumulating more debt will extend the repayment period, due to fees and interest. Implementing a budget can mitigate the risk of overspending and accruing further debt. It's essential to maintain a balance where your expenses remain below your income. Prioritize paying off your debt by allocating as much as possible towards it, even if it requires minor lifestyle adjustments. This proactive approach will lead to faster debt reduction and financial stability.

Understanding Credit

Credit serves as an indicator for an individual’s level of trustworthiness as a borrower. The more you demonstrate good borrowing behavior, the more your trustworthiness grows. When used wisely and responsibly, credit can be a useful tool. A good credit score will let lenders know that you are reliable and trustworthy, which means they are more likely to lend you money. This affects your ability to rent or buy a house, pursue job opportunities, and qualify for loans, etc., so it’s important that you pay your debts regularly and on time every month.

Benefits of Credit

There are many benefits of having credit when used responsibly. They include:

Emergency funds
Ability to buy a house or car
Helps build good credit
Purchase protection
Rewards points

Risks of Credit

There are some risks to credit if not used responsibly. They include:

High interest
Annual fees
Overuse of credit
Increase your debt
Build poor credit

Borrowers Responsibilities

Taking on credit is a big responsibility. Ensure that you are able to handle the responsibilities before you consider taking on credit. Some responsibilities include:

Making payments on time.
Reading and understanding the terms and conditions you are agreeing to.
Refraining from exceeding your credit limit.
Paying back your debt, including fees and interest.
Frequently monitoring your accounts and watching for suspicious activity.
Updating your contact information if anything changes.

Interest Rates

Interest rates are the fees that credit card companies charge you for borrowing money. If you pay off your credit card debt each month instead of carrying a balance, you will not be charged interest. The most common types of interest rates are fixed and variable interest rates.

Fixed Interest Rate

The percentage that you pay in interest stays the same so you know how much to expect your monthly payments to be, however the rates might be higher than other options.

Variable Interest Rate

Your payment and interest rate varies from month to month so you start with a lower interest rate, but you may end up paying a higher interest rate in the long run.

Annual Percentage Rate (APR)

The APR represents the annual cost of borrowing money. The interest rate is administered every month when an outstanding balance exists on the card.

It’s also important to be familiar with fees associated with credit cards, including late fees and over-the-limit fees. Check the agreement for your specific credit card for more details about these fees.

Credit Scores and Reports

The FICO credit score, which ranges from 300 to 850, is used to monitor credit. A lower score indicates that you have a higher credit risk. A credit score is influenced by a number of factors:

Factor	Influence
Payment History	35%
Credit Utilization	30%
Length of History	15%
Credit Types	10%
New Credit	10%

You are allowed to request a free credit report annually. Your credit report includes your credit history and personal information. The three credit reporting agencies are Equifax, Experian, and Transunion.

These agencies are the only authorized providers to issue free credit reports which you are legally entitled to each year. If you decide to check your credit more frequently than once a year, it could have a negative impact on your credit.