Effective Credit Management

Every time a person buys something, he has a choice of whether to pay for it now or to charge it on his credit card. The ease of charging an item is tempting and he can rack up big bills without blinking an eye. Responsible use allows one to finance a purchase when cash is temporarily unavailable. But effective use of credit cards means paying off the debt each month. Otherwise, he will be paying interest, in effect adding a significant amount to the price of each item he buys. If one has built up credit card debts, one should establish goals to pay them off as fast as possible.

How much is too much debt? One guideline is not to owe more than 15 to 20% of one's yearly after-tax income (excluding home mortagage). Another is not to owe more than one third of one's annual discretionary income, which is income left over after basics such as food, clothing and shelter are paid for. However, an acceptable level of debt depends very much on one's circumstances.

The following danger signs may indicate that a person is heading into a 'debt trap' which can become impossible to escape unless immediate action is taken:

• charging purchases that are not really needed
• buying items with minimum down payments
• taking cash advances on credit cards
• borrowing more and more money from family and friends
• using one's cash reserve to pay bills
• postponing paying one's bills
• receiving new bills before old ones are paid
• reaching or exceeding one's credit limit with a credit card or bank

With proper planning, one can escape the 'debt trap' and free onself of financial worries. First, one will need to know exactly where one's money is going. To get an accurate picture of how one's money is spent, track spending for at least three months. Once one is aware of the negative spending habits, one can revise them accoringly. Second, one must start reducing total debt. This requires setting defined goals. For instance, decide how much debt should be paid off within a certain time. Then establish rules that will help one achieve those goals. If the rules are consistently followed, one may find oneself managing debt more efficiently. Here are some practical guidelines for using credit:

• use credit as a last resort
• do not over-commit too casually
• think purchases through
• resolve to spend money only according to one's plan
• pay back what is owed now
• don't take on more debt until the old debts are paid off
• don't borrow to pay off other debts
• leave a margin of safety
• switch between loan facilities

Credit cards can be an aid to managing your personal finances, but like everything else, can bring dire consequences if misused.