Debt is one of the major challenges that an individual has to overcome in order to effectively manage their finances. There are multiple sources through which one can incur debts viz. sudden financial losses, uncalculated expenses, erratic credit card use or regular borrowing of money. If you have difficulties in planning your expenditure according to your income, you could find yourself inching towards a debt trap. Inability to make regular repayment towards loans and credit usage could not only add on to your debt but also be a cause of constant concern. This could also act as a liability that prevents you from making other expenses.
A debt could indicate poor financial management and affect your credit score. A credit score is a three-digit number provided by a recognized credit bureau such as the TransUnion CIBIL Limited. The score ranges from 300 to 900. Banks and other financial institutions send in transaction-related records of potential borrowers to the credit bureaus. After calculation, the credit bureau provides a credit score along with a credit report of the individual to the bank.
The credit score indicates the individual’s credit history and loan-repayment tendencies. These help the financial institutions to assess a person’s credit-worthiness before approving a loan or any other line of credit. In order to avail a credit card, you need to possess a good credit score i.e. above 750. If you regularly find yourself stumbling into debt, this could detrimentally affect your score and hence, your chances of getting a loan sanctioned.
However, you can adopt some strategies to manage your finances and protect yourself from falling into the debt trap. The following methods could be considered to steer clear of debts and elevate your credit score:
Table of Contents
How does debt affect your credit score?
Focus on the debt repayment
Your debt status is crucial in determining your credit score. In order to increase the score and get back on track with your finances, you would have to immediately start paying off your debt. There could be multiple sources of debt, so it is recommended that you begin with high-interest debts. Consistent repayment would reflect positively on your credit score.
There could be a multitude of expenses coming your way, in terms of utility bills or commodity purchase. It is important to regulate your expenses through controlled spending. It is also recommended that having control over your impulses could help you save money for unforeseen expenses that you might bump into.
Choose a beneficial investment plan
It is important to be prepared for any sudden financial expenses that could come your way. One of the best means to improve your savings is to invest your money. If chosen wisely, an investment could guarantee high returns which would help you handle any unexpected expenditure in the future. Surplus gained through an investment could also help you effectively manage your debt.
Avoid non-essential expenses
It is suggested that unless it is necessary, you must try to put off expenses which would slow down your debt repayment. It is crucial to differentiate between ‘needs’ and ‘wants’. Prioritizing your expenditure could prevent you from piling on to the existing debt or creating new ones.
Effective debt management
Debt consolidation and debt restructuring are two options if you are looking at repayment at lower interests or narrowing down your debt sources to one outlet. Opting for these debt management tools can help you choose a repayment plan that offers interest rates and a payment frequency best suited to your needs. It is important to remember you don’t have to treat a ‘debt trap’ as a permanent financial handicap.
If you are able to carefully devise repayment plans, organize your expense and choose the right investment, you would be able to navigate through your debts. In fact, quick and smart debt repayments could not only boost your credit score but also increase your credibility before banks and other financial institutions.