Five Principles of Debt Management

While the news is full of stories of people who have gotten into trouble with debt, it is important to remember that most people use debt regularly without it becoming a problem. What distinguishes constructive use of debt from borrowing that becomes overwhelming? The five principles described below give some guidelines for staying out of trouble.

These five suggestions include using tools such as a credit card debt consolidation loan to help get a handle on rising debt burdens, but they primarily focus on how to avoid such problems in the first place. After all, once you reach the point of having bad credit, debt consolidation and other options become much more limited.

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

Controlling Your Options

Again, the overarching goal is to stay out of trouble. Once you have bad credit, debt consolidation becomes more expensive, and credit in general becomes harder to come by. Staying on top of your borrowing habits and debt burdens will keep more options open to you. Consult a debt management professional if you can't do it alone.

About the Author:
Richard Barrington has been a businessman and writer for a quarter century. Shortly after graduating Magna Cum Laude from St. John Fisher College in 1983, Richard joined Manning & Napier Advisors, Inc., a Registered Investment Advisor. Starting in an entry-level operations position, he worked his way up to become head of marketing and client service, an owner of the firm, and a member of its governing Executive Committee. His efforts contributed to the firm’s growth from slightly over $1 billion in assets under management when he joined, to over $12 billion in 2006. While at Manning & Napier, Richard earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute").

In August, 2006, Richard retired from the investment business to pursue a writing career. He has worked primarily as a freelance writer on a variety of business topics, while also writing manuscripts for three books.