People live on borrowed money, it’s a fact of life. Although, some people make a habit out of it which can sow the seed for future financial disaster. There are many reasons why people choose to live on credit, the insatiable desire for material goods, shopping as a way to deal with stress, keeping up with friends and relatives, satisfying children’s spending habits and much more. To be honest, who is completely debt-free? Even the wealthiest businessmen borrow credit for their new ventures and investment.
There is no ONE solution that satisfies all here, the solution to this ever-growing epidemic is a bit of self-reflection.
- What are the things I can get credit on?
- How many things I should get a loan on concurrently?
- Given my income right now, how many months or years would it take to pay back the credit?
These questions should be the main theme of taking a decision related to credit. There are many financial advisors out there who are unsurprisingly getting popular in the modern world who not only help out people to plan their retirement but also help out with credit-related decisions.
Every year more and more people are falling prey to debt overload, a situation where a person can’t pay their due debt instalment because they have already taken more credit than they can pay off, and debt overhang, a situation where a person’s debt exceeds their capacity to ever pay it back to the point where getting more credit and loans becomes almost impossible.
What many young people don’t realise is their ability to get more credit down the line, where they might be looking to get a mortgage on their house depends on their previous credit score.
A credit score is a direct reflection of a person’s debt behaviour over their life. A good place to start for anyone can be calculating one’s Debt-to-Income (DTI) ratio. The Debt-to-Income income ratio is given by adding up your total recurring monthly obligations (such as mortgage, student loans, auto loans, child support, and credit card payments) and divide by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out). Lenders prefer this ratio to be below 36% with no more than 28% going into one’s mortgage.
In the world of credits and debt, the saying, “better late than sorry” truly holds true. Several things can contribute to minimizing debt in future.
- Not having more than two credit cards and minimizing daily spendings on credit cards.
- Avoiding impulse buying by asking yourself constantly, “Do I really need this?”
- Pay off the credit cards with the highest interest rates first to lessen the debt burden on yourself.
- Make a monthly expected budget chart and compare it with the actual budget chart at the end of each month, reflect what requires improvement.
- Develop a habit of paying cash for your day-to-day spendings.
Living on credit has become the new ‘cool.’ In an attempt to live lavishly today, we often create problems for ourselves in the future. Yes, you should be aiming for a good lifestyle. Yes, you shouldn’t forget to live today in order to save for tomorrow. Most people focus either focus on the ‘live today’ part and forget to ‘save for tomorrow’ and vice versa. We need to find a balance between both for a stress-free life.