How To Manage Your Debt

"A public debt is a kind of anchor in the storm; but if the anchor be too heavy for the vessel, she will be sunk by that very weight which was intended for her preservation."
      - Charles Caleb Colton

My definition of “Debt Management” is much different than you will find on the Internet. On the net, Debt Management refers to a structured payment plan set up by a third party. I prefer to think of those as “Debt Mitigaters” as the damage in most cases has already been done and they seek to get you back on track with your payments.

My definition of Debt Management: Which debts you skillfully CHOOSE to incur with your available credit. That’s right. What items you purchase with credit is the very essence of Debt Management. To me, I see only five good uses for debt.

1. To Build Your Credit Score
2. Gain Security On Your Purchases
3. Emergencies
4. Acquire Assets and
5. Move Existing Unsecured Debt to a Secured Debt

Whoa! What does available credit have to do with managing your debt? It’s all about one thing: What debt you CHOOSE ito incur with your available credit.

The first three above involve the use of credit cards for the most part where the last two tend to involve secured debts of varying sorts.

To Increase Your Credit Score: One of the best ways to increase your standing with credit card companies is to pay on time. When you pay on time, you receive a little “one” for that month, indicating that you paid on time. The more “ones” you have the better your credit rating.

One easy way to get those “ones” without incurring finance charges is to use a credit card for your normal monthly expenses like gas, groceries insurance payments etc. I know it sounds strange but if you pay it off on a monthly basis several advantages emerge.

• Helps You Establish a Budget--By using your statement to track your purchases, you can better see where you may be able to trim on expenses.
• Helps You Establish a Budget--By using your statement to track your purchases, you can better see where you may be able to trim on expenses.
• You are adding to the “ones” on your credit report by doing nothing extra but what you would normally do on a monthly basis.
• Maximize Card Reward Programs--With the right credit card, you could be adding to your “miles.” Therefore your groceries may pay for that annual fishing trip to Alaska. LOL!
• Easy Record Keeping—By reducing your monthly expense to one payment, you make balancing the checkbook that much easier. In addition to that, you now have a second “receipt” so those pesky little slips of paper can go into that shoebox without the anxiety of digging through all of them at tax time.

Remember, increasing your credit score does NOT involve carrying a balance, paying more than the minimum or using it for big purchases. It involves proven, responsible use of credit and what better way to prove that than by paying on time each and every month.

Gain Security on Your Purchases: I think there are very few credit card companies that do not offer some type of buyer’s protection. Most Debit cards have limited versions of this and the Electronic Funds Transfer Act affords you some protection, but meanwhile the money is missing from your checking or savings account and that could prove damaging.

With the explosion of online purchases, it may make sense to add that level of security that a credit card affords you.

Emergencies: We have all been there. The car breaks, you have used up all of your sick days at work and you will have to lose a day of pay if you can’t find a way to get the car fixed and replacing a transmission “ain’t cheap.” I have to say the biggest saving grace to credit cards is for emergency use. For many of you out there that have been in the spot described above, and not had a credit card, the loss of pay just compounds the woes you are already experiencing. No amount of interest can compare to the loss of a days pay. In the case of emergencies, NOT paying interest can be more costly than paying it.

I usually advise people to leave one credit card empty for that very reason. Emergencies come in all shapes and sizes (and prices) so try to use the one that has the biggest limit. The snowball effect of being short a days pay for the year is too damaging to take that chance.

Acquire Assets: I am sure you are all aware that when a company issues stock it is in effect “borrowing” money from the owners of the stock. Now of course if the company goes belly up, most of the stock owners are out of luck so why take that chance? Easy—it’s the possibility of making MORE than you have bought the stock for. So the company borrows from the investors with the intent of using that money to make more money for itself and the stockholders.

If you use your credit to buy items with a good chance of increasing in value, you are making a very smart “Debt Management” decision. Now Im not saying to go out and max out your credit cards to buy shares in “Microsoft” BUT maybe opening a Home Equity Line of Credit at 7% and using the money to make 12% on a mutual fund might be a good idea. Especially since the interest on the heloc is tax-deductible.

The goal of the Acquire Assets section is to not give investing advice but rather to “expand” the possibilities of good Debt Management and open your mind to new ways to put your credit to work FOR YOU.

Move Existing Unsecured Debt to a Secured Debt: As I have mentioned earlier, unsecured debts can pose a potential threat to your ADIOS plan so good “debt Management” practices will find a way to move those unsecured debts over to secured debts. Perhaps the most popular way to do this is a debt-consolidation loan via a mortgage.

In most cases, consolidating debt into a refinance has several benefits. You will reduce your monthly payments allowing you to use the extra cash for other asset acquisitions or maybe to max out your contributions on your 401K that your employer will match. You will drastically lower your interest rates and even turn your interest payments into a tax deduction.

There are other ways as well. What if you have a coin collection that is worth say 2500 dollars? You could go to your local bank and get a collateral loan for a substantially lower interest rate than the credit cards and then use the loan to pay them off. You can then slowly pay off the loan or sell the collection and use the proceeds to pay it off.

Again, the goal here is to not give specific advice but to get those “creative finance juices” flowing! Moving those unsecured debts over to secured debts gives you the option to sell the collateral to pay the debt—An option that unsecured debt does not give you.

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