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Having credit can sound like a financial pitfall to some consumers. But with effective credit management procedures, you can establish a positive credit history and put yourself in a position to qualify for that mortgage or car loan. Good credit management takes planning and determination, but the results can be worth the hard work.

Debt Ratio

One of the questions that consumers often ask is how much credit they should take on at any time. The Motley Fool financial website (see Resources) offers a way of calculating your debt ratio.

For example, if you have $10,000 in debt and an annual income of $40,000, then divide your debt into your income to come up with a debt ratio of 25 percent. The Motley Fool website recommends having an income to debt ratio no higher than 15 percent in order to be able to manage your credit.

Budget

When you start taking on credit debt, you need to keep track of how much overall debt you are accumulating to avoid getting into a situation where your debt is overwhelming your monthly income. Develop a personal budget that lists all of your obligations against your income.

Put at least 10 percent of your income into a savings account each month, and remember to account for your monthly expenses such as gas and food. Tracking your money each month in a budget will allow you to see how much cash you have available and prevent you from taking out more credit than you can afford.

Credit Reports

Stay informed on changes in the credit industry that can benefit you and strengthen your credit report. For example, as of 2011, the Experian credit bureau allows renters to have their good renting history be part of their credit report.

This is an excellent way for you to enhance your credit score if you rent your home without having to take on the additional costs of another credit card. Monitor the news and the credit reporting bureau websites to find new ways of bolstering your credit report without taking on new credit.

Plan Your Spending

Having and using a credit card will help improve your credit as long as you make your monthly payments on time and do not spend to the maximum limit on each card. Only use 30 percent or less of the available limit on each credit account you have, and budget enough money each month to pay more than your monthly minimums.

Paying your minimum payments on time and in full is good for your credit, but paying more than your minimums helps you reduce your interest debt and also boosts your credit score even more.

Many people use debt management programs if they are overwhelmed with credit card debt. You can get your payments reduced as well as your interest rates, but there are some negative effects to your credit file.

Effects

When you enter a debt management program, your credit can be affected. Many of your creditors will accept the debt management plan, but they will report on your file that you are participating in the program. This is one of the first things other creditors will see once you apply for credit after your participation is complete. This could stop you from receiving credit in the future.

Time Frame

Some debt management plans request that you don’t apply for credit during your participation in the program. These plans usually take 36 to 60 months for completion.

Considerations

Applying for credit can depend on your credit score. There are some lenders that will overlook your participation in the debt management program and extend you credit anyway if your credit score meets their credit granting criteria.

Features

Your participation in a debt management program will not lower your credit score but creditors will be aware of your participation.

Warning

If you are listed with a debt management program, you will pay them a lump sum of money and they will disburse payments to your creditors. Payments received late can affect your credit score in a negative way by lowering it. You may want to keep tabs on how a debt management program is handling your accounts. The information reported by a debt management program can remain on your credit file for several years.

Many consumers have too much debt or the inability to pay debt obligations. Credit debt management plans are offered through consumer credit agencies to help individuals gain control of their finances and reduce or eliminate debt. Credit debt management plans cover a variety of financial situations and provide several benefits for consumers who struggle with debt.

Function

Credit debt management involves plans, strategies and programs consumers use to get out of debt or pay off delinquent bills. Consumers typically enroll in debt management plans when creditor accounts pile up and they can no longer meet debt obligations.

Credit counseling agencies administer debt management plans and offer recommendations and advice for consumers based on their unique financial situation. Counseling agencies include community-based organizations, non-profits and private institutions.

Types

Credit debt management programs offer unique solutions for a varying types of debt. Most programs help consumers manage unsecured debt, such as credit cards, lines of credit and medical bills.

Credit counseling is a type of credit debt management program that helps consumers understand the type of debt they have, formulate a budget and develop a financial plan to pay down debts over time.

Credit and debt consolidation is a type of credit debt management program in which consumers consolidate eligible debts and make a single monthly payment toward all debts at once. Debt negotiation is a management program that allows consumers to negotiate lower payments or better terms with creditors to make payments more affordable.

Benefits

Credit debt management is beneficial because it helps consumers organize personal finances. By using debt management services, consumers are able to determine how much debt they are obligated to pay and the actual costs associated with the debt, including fees and interest payments.

Another major benefit of credit debt management is that it helps consumers become debt free. Successful debt management plans help consumers completely eliminate personal debts without accumulating new debt. Read the rest of this entry »