so considering the period taken . It is also clear that the longer the time it takes you to repay the loan the more the interest you pay , even though your monthly repayment is lower . It is therefore in the interest of the creditor to set the lowest possible minimum repayment rate for you . Cheap to service loans are usually the most expensive in the long run . In short , the financial cost of credit is often not worth it and that can be said of most credit
Understand the debt cycle , be the one to break it
The ‘ debt cycle ’ is an out-of-control spiral that starts with an expense that is beyond the current budget , combined with illmanagement of the available credit line , leading to missed due dates and accumulation of extra charges and penalties , concluding with continual borrowing that leads to increased debt , and eventual default .
When your expense exceeds your income , you go into debt . Goaded by easy access to excess purchasing power , when one overlooks their own limitation and continues in the path of mounting debts , default is inevitable . This attracts various charges including interest compounding on a daily basis . At some point , the interest cost becomes such a substantial monthly expense , that your debt completely spirals out of hand .
Difficulties in the attempt to break the debt cycle
Ineffective budgeting
Budgeting helps one prioritize their needs , sort expenses into necessities and luxuries , the must-have and good-to-have . This allows one to create a spending plan for their money . It helps you weed out the unnecessary expenditure and hence keep you out of debt or help you work your way out of debt if you are currently in debt .
Plan your upcoming expenses , record your actual spending , and compare the two in order to find discrepancies . This will help you identify where you have deviated from your plan and help to stick to the budget . Budget helps to control where the money goes , rather than belatedly wondering where it evaporated to .
Giving in to social pressure
Keeping up appearances is essential for us to
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Continued efforts to maintain status in social circles compels many to borrow more and get deeper into the debt trenches . Too many people spend money they have not earned , to buy things they don ’ t need , to impress people they do not like .
maintain our social standing . This forces us to strive to attain luxury and esteem-related needs even when it is difficult to fulfill basic physiological requirements . Job loss and economic crisis caused by the coronavirus pandemic have pushed many people out of the middle-class category and into poverty . This however is not a deterrent enough for people to step back and take into account their revised financial situation . Continued efforts to maintain their status in social circles compels them to borrow more and get deeper into the debt trenches . Too many people spend money they have not earned , to buy things they don ’ t need , to impress people they do not like .
Repayment Prioritization
A fundamental rule of debt management is establishing a routine to pay your bills and sticking to it , come what may . Avoid paying less than ‘ total outstanding ’ in your credit card bill . Set up reminders to pay bills . If one has set-up an auto-debit , make sure the balance is adequate , so as to avoid bounce charges and negative remarks against your record . Pay off the debts from smallest to largest . It is not about math - it is momentum .
Financial Literacy
Out of the total population of our country , only a small percentage is financially literate . Financial literacy grants one the understanding of the various financial tools , such as credit score , tax saving investments , under your belt . Armed with these resources one can handle their debt better and enhance their wealth rather than sinking into debt . Financial education is like an anchor that grants the stability and support .
Invest wisely
The best way to have more money in hand is to make money work for you . Most of the time it is not about how much one makes , rather , how they use it , that makes all the difference . Invest in knowledge to make earnings grow , invest in assets that one understands to ensure steady add-on income , and invest wisely to maximize on tax savings . Wise is he who invests first and spends what is left , rather than spend first and invest what is left .
Ineffective Credit Management
Effectively managing debt is as crucial to establishing a good credit score as is understanding the difference between good and bad debt .
Good debt is the one that adds to one ’ s net worth , has long-term benefits , and improves the lifestyle e . g ., education loan , home loan , business loan .
Bad debt is mainly loans to purchase depreciating assets or for short-term consumption , e . g ., vehicle loans , consumer durable loans , credit card purchase of personal items . Whereas good debt helps one build your future , bad debt robs one of their future .
Rolling over revolving credit
Credit cards and mobile loans are the leading reasons of consumer debt . Easy access to credit is a temptation few are able to resist . Handled wisely , this financial tool can be effective in improving overall standard of living , mishandled this can be the bane of their existence as interest on debts grows without rain .
It is always advisable to make a financially wise choice by : deciding to use cash over credit , saving over spending , investment over speculation , repayment over roll-over , and asset over debt … only this is when you can beat the debt cycle .
Wasilwa Miriongi is a Certified Credit Professional currently working as the Managing Director , Del Creder Credit Management Limited . You can engage him on this or related matters via email at : WMiriongi @ gmail . com .