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Manage Your Debt, Don't Let it Manage You!

Whether you’re looking for ways to dig out of your financial hole or to avoid getting into one, the importance of actively managing your credit and debt profile has never been greater. Americans have become well-versed in asset management, but not necessarily liability management.

Until recently, easy access to credit has made consumers feel immune to the real risks that overextending yourself on credit creates. However, as a result of our current economic environment, it is apparent that consumers are beginning to spend more time and thought on the types of credit they have and how credit is used. In parallel, banks and other creditors have begun to be much more restrictive about who gets approved for new credit and which consumers get the preferred interest rates and products. According to Experian, the average credit score for new mortgage originations is now 740 versus less than 700 just last year. The reality is that consumers need to change their behavior and adapt to the realities of the current environment and cannot wait for the market to change. Here are some simple first steps to consider in liability management:

Step 1: Understand How Credit Works - Now is not the time to worry about your ego and be content that understanding 80 percent of what you need to know about your credit is good enough. More than 9 in 10 consumers are challenged with understanding the basics of how personal credit works to assure they have the best credit and debt profile possible. In most cases, they build credit over a lifetime of "trial and error." Even if you consider yourself knowledgeable about credit, the constantly changing credit environment creates a situation in which you can use a trained professional to be your second set of eyes and keep you educated. The key point is find a knowledgeable person who is trained to help you.

Step 2: Continually Evaluate & Monitor The Health of Your Credit Profile - The second step is to evaluate your current credit and debt profile and establish a plan based on your short- and long-term credit needs. Continually monitoring your credit report and profile is no different or less important today than getting a physical exam by your doctor. You should be sure to scan for accuracy and suspicious activity.

Step 3: Watch for Red Flags - There are credit profile "red flags" that can indicate problems are brewing. Watch for things such as: "maxing out" credit card limits, applying for new credit cards in order to survive, overdrawing your checking account, borrowing from friends to pay debts, not opening your bills and making only minimum payments on credit cards.

Step 4: Optimize Your Credit - You should personally review and analyze each of your debts. Can you pay a little extra the next few months and pay off or pay down bills? Are you able to improve the terms (interest rates, duration, etc.) of the debt? Are there steps you can take to improve your overall credit profile so that you’re more desirable to creditors for their "preferred" interest rates? Should you consolidate some of your debt? Once you strengthen your credit and debt profile, do you have options on your home, auto and credit cards to negotiate lower interest rates that would save you money monthly? Everyone’s situation will be different, but these are all questions Americans should be asking themselves. Many consumers are already taking some of these steps, as evidenced by consumer debt dropping $151.8 billion nationally in the first quarter of 2009 alone.

Step 5: Rethink New Purchases - Excellent credit is like an insurance policy. When you need to use it, you want to help ensure that you qualify for the preferred interest rates and terms that will give you the best payment options based on your needs and capabilities. Just to make this point, consider the following examples:

The big question is which interest rate you would have qualified to receive based on your overall qualification and credit profile. The best way to stay debt-free is not to take on debt in the first place. However, maintaining your credit "insurance policy" is critical for special purchases like a home, car or major appliance. Don’t wait until there’s an immediate need, because your chances of making a material change in your profile overnight are slim.

Don’t let anyone mislead you. It takes time, knowledge and planning to build, optimize and manage your personal credit and debt profile so that you can maintain the affordability of what you have and/or create a better opportunity to qualify for preferred interest rates and terms. Effective liability management starts with the five steps above. Although there are many services that can provide you with a copy of your credit report, this is only part of the first required step. There has never been a more important time to seek the help of a professional and personal credit coach to help you ensure that your credit and debt profile is optimized - not only today but on a continuing basis.