Bad Debt Management Can Wreck Havoc to the Financial Future
Bad debt management didn't get you in this stage knowing how to distinguish bad and good loans. Loans are not always a bad thing you know. How many of us can buy a home without asking for help? Not one, I bet! Even the very rich ones borrow money to buy their home. The only difference between us and them is that most often they do not have to pay interest on their obligation.
Well anyway, in order for this not to happen again, you have to check the loan with a fine-toothed comb. How? I will let you know from my experience and researches I have done. Follow these rules when getting a loan and you will stay out of any bad debt management scenario. So, before getting any loan, check the following items:
What is the interest rate and how often must you make your payment?
What are the terms of the loan?
Are there fees besides the interest? If so, how much is this fee and how often must you pay it?
What kind of interest rate is it: fixed or variable? If variable, on what factors will the change of rate depend on?
How long must you pay for this loan and how much altogether will you have paid for it at the end of the term?
Are you going to be allowed to pay for the loan early? If so, is there a pre-payment penalty? How much is it?
Is a security required for this loan? What is it? Show some cases as to what happens to this security in different scenarios.
Is this loan covered by the Consumer Credit Code?
If you face a challenging issue like a sickness in the family, what will happen to the loan?
Make sure you get all the answers in writing and signed. If after you have followed all these and you still find yourself in a bind with the bad debt management, don't worry. There are ways to fix the problem. You have to list down all your debts. There are two schools of thought in prioritizing your obligations. One school of thought says to list them down according to the rate of interest from the highest to the lowest.
This makes sense in a way because then you try to pay off the one that charges you the most interest. The other school of thought is to arrange the debts according to the amount from the smallest to the largest and to pay off the smallest one first. The reasoning behind this scenario is simple. Once the smallest one is paid, it gives one a feeling of euphoria and an encouragement to keep going to get rid of this bad debt management trouble. Do you follow me?
Whichever you choose, pay off the bad debt first. What do I consider bad? Well anything that goes to consumption like clothes and toys from store credit cards and other forms of credit cards with interest that are not deductible. Get rid of them first. And make sure the rest of the family do not make anymore purchases.
Tell the family that your only obligation to them is to put the basic food on the table, the roof over their head and all the time and protection and love you can give them. And this love is not the kind that can be bought but the kind that comes from the heart.
So here's the list of what to pay off first: store credit cards, other credit cards, the car loans, and then perhaps the mortgage although this one's interest is tax deductible in the US but not in Canada. Loans for investment purposes do not have to be paid off right away as they are tax deductible. Following these rules will enable you, the next time around, to avoid the trap of bad debt management.
Bad Debt Management, Learn the Skills First
Bad Debt Management will continue to put one in financial jeopardy unless good consumer debt management skills are learned first. The real problem is that some do not know how to manage their money. They may ignore the signs of poor money management and then it gets out of hand. Remember that to get out of debt, you have to consistently learn and apply good financial practices.
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