Lenders never asked borrowers how much they know about debt management. As a matter of fact they penalize you with late fees and increased rates when you fail to comply with the rules. That is their way of making you pay more attention with managing your debts. This is specifically true with credit card debts. Pay your debts in good time all the time to avoid penalties and increased rates. To be able to do that you must have the proper tools for debt management. The tools for debt management are the following.
1. Income
2. Emergency fund and/or disability insurance
3. Health insurance
4. Savings and Retirement Plan
If you are satisfied with what your present income can buy you obviously do not need to borrow. If the things you want can wait until you have saved enough to pay them in full; that would be nice. In the real world however there are things you need that can not wait and you need to some financing to get it such as a car and a house.
There is such thing as a good debt and a bad debt. A loan to buy a car or a house is good but a credit card debt incurred in excessive entertainment and luxurious expenditures is to be avoided. The key to good debt management is knowing when to slow down with your spending habits. On a monthly basis, after setting aside the funds for essential expenditures what is left with your take-home pay should be able to cover twice the minimum amount required to pay your monthly credit card balance. Essential expenditures should not suffer because you do not have enough left from your take-home pay to even pay the minimum amount required for your monthly credit card statement.
An emergency fund is necessary to cover situations where the income is just not there because of an illness or job loss. You must be able to pay your mortgage and car loan until income is restored. Disability insurance if available will cover part if not all the necessary expenditures so as to conserve the emergency fund and the Savings and Retirement Plan.
You can not be without health insurance because medical bills are not meant for you to pay alone. Medical bills and prescription drugs are just too much for the average Joe. Do not rely on the health insurance too much; you still have to take care of your health because health insurance has limitations in coverage.
It is important to watch the use of your credit card to preserve your tools of debt management i.e. the emergency fund and the Savings and Retirement fund. The health and disability insurance are there to keep you from incurring too much debt because of illness or disability.
Hopefully, when you retire debt is no longer a problem. If your Savings and Retirement Plan, which is one of the tools of debt management, is not touched to resolve some of your debt problems, you must be a good debt manager.