When we talk about financial management, the focus is imperatively on income, expenses and assets. Wealth generation and hence financial freedom is the ultimate goal. However, it is a long and arduous journey for most ordinary people. While one must focus on wealth generation and should have assets, it is equally important to think about debt management. Financial management is as much about debts as it is about assets.
- The best debt advice anyone can ever offer you is to borrow just enough that you need, not more or less. Some people borrow more than they need and risk getting into an unmanageable debt. Some people borrow less and then need some more money. This leads them to another loan. Having multiple loans at the same time is a bad idea. It is not feasible since you are not only repaying two loans but also the interests on them. There is a cumulative effect that is best avoided. You should borrow enough to solve a problem. If there is another financial crisis in the near future, you can borrow again. The timely repayment of one loan will improve your credit score. Your enhanced creditworthiness will make you eligible for better terms in the future. Borrowing more and then mismanaging the debt will lead to one more distress you do not want to deal with.
- Always ensure that your timely repayments get reported to the credit bureaus. There is an unfortunate reality about credit bureaus and how different lenders report their associations with borrowers. Almost all lenders are prompt when it comes to reporting negative experiences. If you default on a loan, it will be certainly reported. Some lenders are more responsive and will report such defaults immediately. This has a direct and almost immediate impact on the credit score. Positive reports do not have as much of an impact and some lenders may not furnish such data in a timely manner. When you have to bear the fallout of a default, you must also be able to capitalize on timely repayments. Ask your lender to report such positive information to the credit bureaus and then check your annual credit report to assess the improvement.
- Avoid easy loans when you do not need one. There are many lenders, including banks and private firms, who will probe you, send blast emails and encourage you to take a loan. Some of these lenders make it effortless to apply and get approved. If you do not need a loan, do not consider it at all. People get tempted to take a loan for a holiday, for a major home improvement that is not absolutely necessary or to buy gadgets and other stuff that are not basic needs. If you have such an approach, be completely certain of your ability to repay. Many people get into debt because they fail to manage the use of credit card. Many get into a cycle of debt because they fail to repay one loan, then a second and subsequently others.