The concept of avoiding revolving credit through debt management makes perfect sense, but what does it really mean? What is revolving credit and doesn’t effective debt management automatically mean resolving potential debt problems?
While monthly personal budgeting is very important to debt management, it is not the same as avoiding revolving credit. As you very well know, budgeting makes the difference between paying your bills and avoiding cut off notices and letters from collection agencies.
Effective debt management means managing your money in such a way that you are paying down the principal on all money owed, not just the interest and minimum payments. The biggest common mistake people make is only making the minimum payment on their debts. Why is this such a mistake?
The simple answer is that the minimum payment amount is not meant to actually reduce the amount that you owe. If you look at your credit card statement you will most likely find that your minimum payment covers all the interest for you balance owed plus a tiny portion of the principal. The amount of the principal will vary from $5.00 to 10% of the amount owed. Why is the amount of the principal paid down so low? It generates more profit for the lender. The longer it takes you to pay down your credit cards, the more money they will collect from you in interest fees.
Revolving credit is a different situation that is closely related. Revolving credit is the act of reusing all the credit that you have paid off thus leaving you owing basically the same. The key to maintaining the best possible credit rating is maintaining no more than 70% of your debt load and paying off you balance every month or at least 25% of the new charges. Avoiding this situation can be tricky to do especially if your debt load is relatively high.
There are several things that you can do to avoid revolving credit. The first thing is to identify your highest interest loans and determine the best course of action for them. Can you afford to pay a little more on this debt in order to reduce the principal faster? If you can not afford to reduce the principal then examine the possibility of transferring the debt to another source. Perhaps you have another credit card or line of credit available to you that has a lower interest rate. If this is true then move as much of your balance over as soon as possible and you will save a lot of money in interest charges.
Effectively managing your debts is closely related to but not the same as avoiding revolving credit. Failing to control either aspect of your budgeting can result in you paying many times more than you owe in interest charges or possibly even ruin your credit. If you are finding that you are using revolving credit or are not aggressively paying down the principal on your loans, then it might be time to seek a little credit counseling help before the little problems become big problems.