Principles of public debt management
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They are five principles of public debt management ...
Budget Before You Borrow. Never borrow money without having measured your ability to repay the loan. Don't fall into the trap of mistaking the availability of credit for the ability to pay it off. In other words, just because you qualify for a loan doesn't mean you have enough cash flow to make the monthly payments. Budgeting before you borrow will not only test your ability to repay before you take on debt, it will help you plan for managing the payments.
Distinguish Between One-Time and Recurring Borrowing. As a rule of thumb, debt is best used for non-regularly recurring expenses, such as college tuition or major purchases like a car or a house. Borrowing to meet regular monthly expenses is a sign of trouble--it means you have to rein in spending to live within your means.
Don't Borrow Long for Short-Term Purchases. If you are going to be paying off debt for a period of years, make sure it goes toward purchases that have value for at least that long. If you habitually spend five years paying for a 2 week vacation, for example, you are likely to find your debts increasing faster than you can pay them off.
Understand Why Minimum Payments Are Not Good Enough. The minimum payment on credit card debt is usually very forgiving at first, but don't be lulled into a false sense of security by this low amount. Often that minimum payment doesn't even cover the interest accruing on the debt, let alone go toward paying what you owe. This is how people find their debts continuing to increase even after they stop borrowing. That minimum payment may be good enough for the credit card company, but it shouldn't be good enough for you.
Use Debt Consolidation Programs Effectively. If you do find debts accumulating, a debt consolidation program is one of the first options you should consider. There are several kinds of debt consolidation programs, but the best ones should actually reduce your monthly payments and interest charges, rather than simply sweeping all your debt into one pile. Credit card debt consolidation loans can represent one of the most likely ways to reduce payments, since credit card debt tends to have particularly high interest charges associated with it.
Budget Before You Borrow. Never borrow money without having measured your ability to repay the loan. Don't fall into the trap of mistaking the availability of credit for the ability to pay it off. In other words, just because you qualify for a loan doesn't mean you have enough cash flow to make the monthly payments. Budgeting before you borrow will not only test your ability to repay before you take on debt, it will help you plan for managing the payments.
Distinguish Between One-Time and Recurring Borrowing. As a rule of thumb, debt is best used for non-regularly recurring expenses, such as college tuition or major purchases like a car or a house. Borrowing to meet regular monthly expenses is a sign of trouble--it means you have to rein in spending to live within your means.
Don't Borrow Long for Short-Term Purchases. If you are going to be paying off debt for a period of years, make sure it goes toward purchases that have value for at least that long. If you habitually spend five years paying for a 2 week vacation, for example, you are likely to find your debts increasing faster than you can pay them off.
Understand Why Minimum Payments Are Not Good Enough. The minimum payment on credit card debt is usually very forgiving at first, but don't be lulled into a false sense of security by this low amount. Often that minimum payment doesn't even cover the interest accruing on the debt, let alone go toward paying what you owe. This is how people find their debts continuing to increase even after they stop borrowing. That minimum payment may be good enough for the credit card company, but it shouldn't be good enough for you.
Use Debt Consolidation Programs Effectively. If you do find debts accumulating, a debt consolidation program is one of the first options you should consider. There are several kinds of debt consolidation programs, but the best ones should actually reduce your monthly payments and interest charges, rather than simply sweeping all your debt into one pile. Credit card debt consolidation loans can represent one of the most likely ways to reduce payments, since credit card debt tends to have particularly high interest charges associated with it.
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