Thursday, February 19, 2009

Should I Plan for Debt?

With so much at stake, the idea of planning for debt becomes paramount. One way is through careless actions and taking on more debt than your income can handle. Without trying to sound cynical or sarcastic there are two ways to approach debt.

If it is a given that most people will need to use credit and debt in order to survive in a particular economy, then careful planning on how to use that credit and debt becomes important. The problem occurs when consumers do not control their level of debt or do not take into account the many possible events that can happen to them that can affect their ability to bring in an income. Debt, in and of itself, is not an evil, but rather a means of allowing people to enjoy a better standard of living without having to pay for that standard up front. It would be difficult, if not impossible, to make it through life in this age without going into debt at some time or another.

If you are new credit, or just starting out, be aware that you will, over the years, receive hundreds, if not thousands, of applications for credit from various companies. Much of this will arrive in the mail. It is important to refrain from applying for all that credit. This is one of the major ways that people find themselves in financial trouble. One credit card becomes two, two become four, and before you know it, you have a wallet full of them. The temptation to use them will be high, and if you do use them, you can expect a bill every month from those that have outstanding balances. It can, and does, become a mountain of debt before long.

When you are just starting out, plan to have no more than two credit cards, and use those cards sparingly. Do not be tempted to buy something just because you can. Purchase only what you have to purchase and keep your balance due on the card as low as possible. Whenever possible, plan to pay off the entire balance rather than the minimum payment.

Other debt items that you should plan for are high ticket items such as automobiles and homes. Many consumers are tempted by "no money down" offers from car dealers and some home sellers. Before you fall for that, sit down and think carefully. While it might seem nice to bypass the down payment, doing so will extend the loan period which means you will pay more in the long run. In some cases, you may end up paying a lot more.

So while you may think that you are keeping your cash, in reality, the lender will get it later on through higher rates and longer terms. These higher rates can add substantially to the overall cost of the item. Often you will find that no down payment offers are coupled with higher interest rates.

Plan for your debt and be prepared for it and you will find that living with credit does not have to be stressful. The more money that can be put down on a home loan is money well spent and well invested. This is especially helpful and valuable when purchasing a home. The better way to handle high ticket items is to begin saving for the down payment well in advance of needing it.


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