The four steps to managing debt

BY STEVEN E. LOWELL

As a modern-day consumer, you need the ability to borrow money. There was a time when if you couldn’t pay cash for your purchase, then you were told you shouldn’t buy it. That may have held true many years ago, but it is not a realistic approach today. The average cost of a home, a college education and even a car have outstripped most wage increases. To think that a person or a couple can operate without debt is not feasible for most of us.

While consumer debt has increased steadily over the past several years, it declined when the economy started to weaken in 2008 and consumers began paying down loans and credit cards. While total credit card debt in America is currently $883 billion, it’s important to note that 40 percent to 50 percent of cardholders pay off their balances in full each month.

The first step in managing debt is to establish a positive credit record. Parents, this is something that you need to talk with your children about. Unless you have an established credit record, most financial institutions will not lend you money. If you have no credit experience, there are several ways to get started. The best bet is to think small. A credit card with a low limit or a demand deposit loan tied to a checking account might be the way to begin. You may need a co-signer to guarantee the original term, but when you pay your obligations as agreed, you will be surprised how quickly you will be able to borrow higher amounts.

The second step is to know what borrowing options are available to you. You want to choose the best debt instrument to borrow money. A key consideration is interest rate, but that’s only part of the answer. Make sure you ask and know all of the terms involved with the obligation. Some loans have variable rates, while others are open-ended, or even have tax-deductible interest. Make sure that you take the time to educate yourself, and shop around. It is a very competitive market.

The third step is to protect your credit rating. We talked earlier about establishing credit, equally as important, is to make sure to repay your obligations as agreed. Understand that it is your responsibility to manage your debt. Don’t borrow more than you can comfortably repay and, most importantly, understand how you are going to repay what you borrow. And make sure that you check your credit rating. Request your credit report with all three credit agencies at least annually (they are Experian, Equifax and TransUnion). Make sure that everything listed on the report is accurate. Mistakes can appear and could cause the loan that you are applying for to be denied. Don’t wait until you are in the application process. If you find an error, go through the process to have it corrected.

Finally, know what to do if you run into a credit problem. There are usually a number of warning signs:

■ Paying only the minimum amount or making late payments repeatedly;
■ Being out of cash constantly;
■ Taking longer and longer to pay off balances; and
■ Borrowing from one lender to pay another.

If you realize that you are running into one of these situations, don’t panic, but do act quickly. First of all, make a realistic budget and stick to it. Next, contact your creditors and tell them about your situation. Most will work with you if you demonstrate that you want to pay. Manage your debt and take care of your good credit, they will pay you back in return and always work hard for you. ■

Steven E. Lowell is Executive Vice President and Chief Operating Officer of Cape Cod Cooperative Bank. He can be reached at (508) 568-3309 or slowell@capecodcoop.com.


Published in Cape & Plymouth Business May 2010