Understand Your Personal Debt

If you are experiencing financial problems, the worry and stress that come with dealing with these issues can be overwhelming. The first step you need to take is to organize your finances. This means fully understanding exactly how much money you owe and to whom you owe it. Without this information, it will be impossible to successfully take control of your financial situation and make positive and lasting changing in your spending habits.

What Is Debt?

Debt is simply something owed by a person to someone else. It can be in the form of money, goods, or even services. The reasons why people go into debt are long and varied but some of the more common causes are these:

• Medical expenses
• Divorce
• Reduced income (with the same expenses)
• Little or no money-management skills
• Gambling
• Having too little savings (or none at all)
• Underemployment
• No understanding of financial matters
• No ability to communicate about money issues

Taking the time to go over all of your financial obligations forces you to see the "big picture". If you have never done this, it can be a surprising and even frightening experience. Sitting down and going over your debts allows you to see areas that can be improved and where costs can be cut.

How To Start

Now that you are ready to start understanding your debt, the first thing you have to do is calculate what you owe and to whom. This is relatively low-tech- you simply need to gather up your individual bills and make a list of the amount you owe and the name of the creditor. You can do this either manually or by using a personal finance computer program such as Microsoft Money or Quicken.

A good method of finding out all of your creditors is to request a free copy of your credit report from the three major reporting credit bureaus. These are Experian, Equifax, and TransUnion. You are entitled to one free copy from each credit bureau per year. It's smart to get in the habit of checking your credit report at least once every year to verify that all of the information is correct and up-to-date. It's important to note that the information contained in your credit report may not be the latest available. To find out the actual outstanding balances on your accounts, you should contact each creditor and ask for your current balance.

If possible, sign up for online access to all of your accounts. This will allow you to keep track of your accounts easily and safely. Most websites for credit cards, auto loans, etc., offer online payment options which enable you to make payments on the actual due date. This feature makes it simple to make on-time payments and helps you avoid late charges and over-limit fees.

Debt: Good vs. Bad

Most experts would agree that the above-listed reasons for debt fall into the "bad" category. Bad debt is the more common form of debt among American consumers today. This type of debt usually refers to debt that is accumulated with the use of credit (instead of cash) to buy everyday items and disposable goods. Examples would be credit card debt and auto loans.

On the other hand, "good" debt is generally considered any debt you take on that will produce value over time. Home mortgages and student loans would be examples of good debt.

The bottom line is not all debt is bad. A good credit history is built upon your ability to manage your debt responsibly and pay your creditors in a timely, consistent manner. The key is to not accumulate more debt than you can handle. This means living within your means, accumulating savings, and staying in control of your personal finances. The rewards are well worth it.