Define Credit Management

Credit financing is a means to purchasing big-ticket items, while also providing for everyday expenses. Efficient credit management strategy is essential to financial planning. Of course, debt management takes interest rates into consideration when coordinating payments. Monitoring and adjusting personal debt levels enables you to direct interest savings toward wealth creation. Sophisticated investors leverage debt financing to purchase investments that dramatically improve their respective bottom lines.

Identification

Proper credit management requires that you differentiate between good and bad debt. Good debt features low interest rates that contribute to financial growth through leverage. Mortgages, commercial debt and student loans are examples of good debt that generate increased earnings. Conversely, bad debt is associated with consumption spending and high interest rates. Credit cards are examples of bad debt, which adversely affect your savings because of interest charges. Ideal credit management focuses upon minimizing the amount of bad debt on your personal balance sheet.

Features

Debt management prioritizes payments according to interest rates. High-interest rate debt should be paid off first, to save money over the long-term. If possible, you may direct available savings toward paying off expensive credit cards. Work to maintain cash reserves worth three months of your living expenses, as you draw down debt. Next, calculate monthly cash flow by subtracting monthly expenses from income. Spend cash and continue meeting the minimum payment requirements upon your low interest rate debt, so that you may aggressively eliminate expensive credit cards and loans. You may also consider refinancing high interest-rate debt by taking out new loans at lower rates to pay off old liabilities.

Considerations

The Fair Credit Reporting Act grants Americans access to one free credit report per year through annualcreditreport.com. Equifax, Experian and TransUnion are the three major credit-reporting agencies responsible for compiling the information. The credit report lists your creditors, loan balances and payment history. Verify that the information is correct, and contact the relevant agency to dispute any claims. Beyond basic verification, analyze the credit report to recognize the strengths and weaknesses of your personal financial outlook. Fair Isaac Corporation (FICO) credit scores are available for purchase to gauge your progress. FICO credit scores range between 300 and 850---with scores above 680 being satisfactory.

Benefits

Intelligent debt management is designed to reduce interest expense and create wealth. The interest expenses on your current debt decrease as loans are repaid. Furthermore, banks also analyze credit reports and extend favorable, low-interest loans to customers who demonstrate strong debt management. Effective debt management techniques allow you to negotiate better loan terms with creditors. At that point, mortgages and business loans may be leveraged to purchase property and investments that enhance your net worth.

Risks

People struggling with heavy debt burdens may become desperate for immediate relief. According to the Federal Trade Commission, scam artists prey upon this desperation---making the situation worse by offering fraudulent credit repair schemes at expensive rates. Be advised that no quick fix exists to eliminate debt. Efficient debt management often requires long-term planning and changes in personal values.