Debt



Manage Your Credit
Your ability to handle credit will be influenced by many factors. Some of these include your income, your expenses, the interest rates on your loans, whether you have borrowed any money, any hire purchases that you have and your own financial administration. In managing your credit you have to determine whether you have taken on too much debt.

This can be seen by looking at the following:

  • Compare the percentage of your take home pay (your disposable income) which you need to pay your debts with, other than your mortgage and other monthly credit card debts.

  • If your debt payment, as a percentage of a disposable income, is 10% or less then you are considered conservative. If it is more than 20% you have probably over extended your credit.


How Do You Monitor Your Debt?

" The way to control your borrowing is through good credit management ..."

The way to control your borrowing is to ensure that you have good credit management. This involves developing a budget and sticking to it.

You can develop a budget by following the simple steps below.

  • Estimate your income including all your earnings from all sources.
  • Estimate your investments and savings in all bank accounts.
  • Estimate your expenses for things such as rent, insurance, phone, entertainment, food, clothing etc.
  • Work out the payments for your loans such as mortgage, credit cards etc.
  • Calculate your income less your expenses and your loan payments and determine whether you have a surplus or a shortage.
  • Peg back all your figures so that you have sufficient income to meet your fixed and variable expenses, and leave you a surplus for emergencies.


Why Credit Cards are Popular
Credit cards are popular because they give you the ability to either pay in full each month or extend your payments by revolving the balance due. You can either pay the minimum amount due, or pay any amount over the minimum to reduce your balance. This helps you manage your expenses from month to month but you need to keep in mind that credit card costs are at a very high interest rate, so the lower the balance, the better.

Some costs that credit card companies charge include:

  • Annual fees.
  • Fees for advances of cash.
  • Any penalties for exceeding your credit limit.
  • Late fees if you pay less than the required minimum.
  • A fee for having more than one card issued.
  • Any finance charges.
  • Over the limit fees.

Demand for Credit and Its Effects
The demand for credit arises out of the desire to finance the following:

  • New enterprises.
  • Consumer spending.
  • Investment.

Financing a new enterprise involves the purchase or development of a new enterprise, or extending an existing enterprise to involve extra production, resulting in increased revenue. As the economy grows the amount of credit grows in support and if the money supply is somehow fixed, the economy will stagnate because of inadequate liquidity. Money that is borrowed for consumer purchases implies the availability of consumer products whose prices have already been set by sellers. This type of borrowing increases the money supply without affecting prices.

However, where the supply is less than the demand, prices will generally rise. Money that is borrowed for investment purposes affects asset prices, particularly shares in real estate. If the borrowing cost is too low for a lengthy period, asset prices could become inflated. The resulting wealth may lead to a more relaxed attitude towards consumer prices and prices will generally increase.