Indebtedness

Unfortunately, Americans today are literally up to their eyeballs in debt. The total amount of debt in the United States is at an all-time high. Recent statistics indicate average debt per household (excluding home mortgage) exceeds 125% of annual household income (debt-to-income ratio). However, debt does not have to be a bad thing. Mortgages oftentimes facilitate home ownership. Student loans enable the college-bound the opportunity to obtain a degree. Automobile loans can pave the way to get to work, to church and to visit people. The key is determining who has mastered whom: Is debt the master or has the debtor mastered debt.

Understanding and Managing Credit

The good or bad news comes down to how a person manages debt. Understanding and managing credit doesn’t have to be difficult nor stressful. Knowledge, understanding and wisdom will strengthen your ability to handle credit.

Credit is the amount of trust a lender has in the person’s promise to repay his or her debt. The lending formula is quite simply: more trust equals more credit. Most lenders use credit reports and credit scores to determine how much credit to extend to prospective borrowers. Lenders are particularly concerned about borrowers having a history of tax liens, court judgments and bankruptcies.

A borrower’s credit score is based on a number of factors including:

• How is the borrower at paying their bills
• Outstanding balances on the borrowers existing accounts
• Length of time the borrowers accounts have been open
• How often borrower has applied for credit
• The Borrowers debt-to-income ratio

The best way to ensure a good credit rating and receive credit when needed is to continue handling it responsibly. This means paying bills on time, not pushing account balances to their credit limit, not applying for unnecessary credit cards, and reviewing your credit report every year for errors or inaccuracies and get them corrected. These errors or inaccuracies can be caused by simple errors or fraudulent activities.

Winning the Credit Game

Monitor Your Credit Report: The borrower’s credit history is what banks and other lenders look at to determine your ability to incur debt. The more confidence the lender has in you, the more money they will lend and offer a better (lower) interest rate. In order to get on or stay on the winning team: build a solid credit history with a high credit score, pay bills on time and don’t overextend credit balances.

Listed below are the three largest credit reporting agencies in the U.S. Contact them and obtain a copy of your personal report (beware of small fee charged for this service).

Equifax
Experian
Trans. Union
P.O. Box 740241 P.O. Box 2002 P.O. Box 1000
Atlanta, Ga. 30374 Allen, Tx. 75013 Chester, Pa. 19022
(800) 685-1111 (888) 397-3742 (800) 916-8800

Develop a Budget – and follow it: achieve the discipline of implementing a well-thought out budget and absolutely follow it with no exceptions (at least the first year). The first step in controlling your financial freedom is to take a look at how money is coming into the household and how much is going out. Surprisingly, a large number of people don’t have an accurate or realistic view of what they’re spending money on. Consider the following three steps in this regard:

1) Separate and total all of your fixed expenses (e.g. mortgage payment, loans, church giving, etc.) and then your variable expenses (clothing, recreation, food, entertainment, etc.) into a formal list.

2) Identify those expenses that are necessary covering the basics: church giving, housing, food, health care, insurances, etc. Make sure you allocate a portion of your monthly income for savings and retirement. Treat these as expense items.

3) Prioritize the loan list in order of highest interest rate to lowest. With the leftover (surplus) income, focus on paying down or off the highest loans or cards first. The goal should be to eliminate all consumer credit card debt within a reasonable time period.

Consider the following 10 tips for a debt-free lifestyle:

1) Set Financial Goals
The way to move beyond instant gratification is by setting financial goals. Set
some short-term goals, such as “paying off credit card balances”, if any. Then set
some goals for the long-term such as “buying a car” or “buying a house” or bigger
home, if needed. Goal setting, implementation and achievement of those goals
will serve as great motivators needed to accomplish those targeted goals.

2) Plan Ahead
Don’t focus on tackling some oppressively huge, lifelong plan just yet; rather, s simple spending plan. Most everyone likes to impulsively spend. A “Plan” helps
bring home what you need. Write down all of your income sources and then what
you spend money over the course of a month. Try to make them balance and
don’t forget to include saving money for both the short and long-term goals
identified in item 1 above. Not enough money for everything? Choose this day
whether you must increase income or decrease spending.

3) Get Organized
Now that you have set financial goals and have a plan in place, keep track of
things by using a program such as Quicken, Money or even Excel spreadsheet –
whichever works best for you. The best way to realize yours goals and avoid
financial difficulties is to “know the numbers”. Following a budget is a form of
discipline and is just good common sense for most everyone.


4) Learn to Systematically Save
Everyone will benefit by putting some money into savings each pay period.
Doing so will enable the building of a cash reserve (of up to one year’s expenses)
and also facilitate achieving the short and long-term goals targeted in item 1
above.

5) Don’t Fret – Get out of Debt
Long-term debt makes sense for long-term purchases such as a acquiring a home
or perhaps a vehicle. But credit card or department store debt for any length of
time is for the undisciplined. Always pay monthly credit card charges each month
and not fret about the monthly interest expense. If you have credit card balances,
pay them down as soon as possible and get out of debt. Worrying or fretting is
not good for anyone, nor is the high interest rates and costs of such borrowing.

6) Plan for Retirement
Determine when to retire from your employment. Before its too late, plug in your
goals and savings plan so financially this goal is achievable. Don’t overdue it
such that the journey to retirement is stressful and pure agony.


7) Invest your Savings
Making investments is like saving money but different. Money is usually put into
a bank or credit union account with savings. Investments are put into stocks,
bonds or mutual funds accounts. Find a trustworthy, competent Financial Advisor
who will take the time to understand your needs and temperament. Avoid the
“securities salesman”. An unbiased Advisor is hard to find so stick with a good
one.

8) Insure Your Assets and Income
For the big items like your house and vehicles, you need the protection insurance
provides. If others (dependents) rely on your income, you need life insurance
and/or disability income coverage. Responsible adults take care of the present
and future needs of their dependents.

9) Safeguard your Money
Now that you have money and a financial future, watch out for those who will try
to separate you from it. Well-meaning friends, relatives and even “financial panners” may have other plans for your money. Protect or safeguard your money:
learn to say “No Thanks”.

10) Rejoice and Give Thanks
Congratulations! You’ve done the difficult matters of discipline; now relax and
rejoice at least for a little while. Don’t forget to give thanks as things improve
(and they do for people who have items 1 through 9 above in place) as you
achieve the debt-free lifestyle.