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Manage Your Debt Efficiently

Efficient management of debt is an integral part of overall financial management of an individual. Ideally one should not have any debt (if we go by traditional wisdom of living within means). But we all know, in the current scenario that is not possible. 

Debt, whether long term in the form of housing or auto loans; medium term in the form of personal loans; or short-term when we swipe our credit cards, is part of everyday life today.

It’s important that you manage your debt efficiently because it affects not only your current financial health but also your future financial worthiness and of course your mental health and peace.

Whether it is governments, corporate houses or individual, all need to borrow from time to time for a variety of reasons. As stated above, borrowing is common by individuals today; what is required is an effective and efficient approach towards debt management.

Efficient Debt Management should not be an afterthought, once you have procured a loan or swiped your card. It has to be a well planned and well thought approach that is a part of your financial behavior.

Plan Well
This is the first, and by far the most important step, for effective debt management. Planning ahead saves you from a lot of pitfalls that you may encounter later on. Once you have taken a bad loan or run up a huge credit card bill, there is precious little that you can do except damage control. Before applying for a loan, its best to look at your financial conditions; though the lender will also assess your financial health, but some facts might be known to you and may not be reflected in numbers.

Example: Mr. Mehta has a credit score of 720; it is a cakewalk for him to get a loan sanctioned. But the credit score does not reflect the fact that within a few months his daughter plans to go abroad for higher studies. So before Mr. Mehta applies for fresh debt, he needs to keep the additional expenditure one time and recurring that he will incur.

For credit card usage also it helps to have some rules laid down so that you don’t end up swiping first and regretting later. In case you have thought about how to increase your cibil score then not exhausting your credit card limit is a step in the positive direction.

Whether it’s a loan or a credit card, always compare before making a choice and continue to evaluate your choice even after you have applied for one. When comparing loans, apart from the obvious factor interest, other aspects like processing fees, pre-closure terms, loan duration etc need to be compared from one lender to another. Getting a loan at favorable terms and a lower rate, goes a long way in efficiently managing your debt in the long term.

For credit cards also, factors like joining fees, late payment terms and fees, billing cycle, cash withdrawal terms etc must be studied before choosing one. It’s advisable to compare between various options and then make an informed decision.

Sometimes it may make sense to compare across products too. Before you apply for a personal loan think... wouldn’t it be better to borrow against the fixed deposit or a post office deposit. It might save you not only interest amount but also processing fees and no pre-closure charges. Similarly before you decide to buy something on EMIs using your credit card; think is it a cost effective option?

Timely Payments
Nothing beats this simple step. Paying on time is the most important aspect. Delayed payments cause you financial loss in the form of late payment fees whether its EMIs or delayed credit card payments. It also has an adverse impact on the Credit Report. Often interest also mounts on the delayed payment and if not addressed at the proper junction it might result in further damage like piling of charges and interest, action by the lender etc. Apart from this it’s simply bad for your credit score and financial credibility.

Evaluate Periodically
You have shopped for the best loan and credit card and you pay on time; but there is still something that can be done for efficient debt management. Evaluate you loan conditions and interest periodically. But that does not mean that you jump at the first loan offer that is offered at lower interest rates and switch lenders. Compare other conditions also and also look at the cost of loan takeover by another lender; is it worth it? The same applies to credit cards also.

In case you have surplus amount, then again do not simply jump to the conclusion of fore-closing your loan. If you have more than one loan then look at the conditions for both of them; which does not have a fore-closure penalty and sometimes servicing a loan for a longer period is better for the credit rating so keep that in mind.

The above steps highlight the efficient debt management needs to start before applying for debt, has to be inculcated in your financial habits and involves periodic evaluation.

Author Bio- Arun Ramamurthy is an IIM alumnus with work experience at leading global banks in India. He is the co-founder of Credit Sudhaar, a company which aims to spread awareness about importance of credit health and help people achieve their financial objectives. He co-authored the book 'Unlock the Power of your Credit Score'.

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