?Till debt do us part?. While this was intended to be the first line of a witty opening to the grave topic of debt management, somehow, making digs by comparing marriage, credit and death doesn’t seem so appealing anymore. The numerous heart wrenching and tragic-stricken stories about debt-affected families and often their sole bread earner committing suicide, would only tarnish their souls further if one were to still take such things lightly. The newly released movie EMI, starring Sanjay Dutt as ?Sattar bhai? a recovery agent, too, talks about loans and credit card defaults, highlighting this new social problem in urban India. The controversial and much-feared recovery agents if one recalls, are amongst those that have increased hospital charges and suicide rates alarmingly in the past.

A month ago in Mumbai, Sudhir, a 42-year-old engineer and his elder sister Suchitra age 46, and a deputy general manager at BHEL, were found dead at their home. Their parents were also found dead in their own room and a suicide note, which stated that the brother-sister duo had killed their parents and then themselves.

The reason, the siblings had 72 credit cards between them, a huge outstanding debt, a personal loan of Rs 8 lakh and from the looks of it, no way out of this tricky situation. While debt-related suicides were rare, except amongst farmers in rural India, and the occasional broken businessman, stock broker or tarnished highflying corporate one read of in the city, the recent spate of events are too close to home for comfort.

Debt at times is a necessity, at times a boon, a lifeline in cases and above all, it is very convenient to say the least. It, like all other things has both good and bad sides. However, by understanding the bad sides enough to take adequate precautions, one can enjoy the benefits of taking loans, swiping credit cards and taking other forms of debt, while continuing to use it for the convenience it was intended to provide. ?Debt is not something to be taken lightly, manage it prudently if you must have it all. I personally in all my years of business have just one credit card in my name, which too I keep more so for emergencies? said a senior businessman.

The debt trap

?Capital must protect itself in every way. Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principled men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd,? are words suspected to have been written by none other than JP Morgan itself in a private communiqu? to leading US Bankers only, in 1934.

A chilling thought if these words were true, though while many may be surprised and vehemently oppose such a comment ever having being passed, if one opens their minds to see things the way they are, the traps appear clearer. Especially given the US financial condition now, JP Morgan Bank’s current position and lastly if one happened to have seen a banned documentary by the name of ?Zeitgeist?, conspiracy theory believers or not, the fact that debt is a trap in most instances, appears more obvious.

Arun Phukral, MD, Cibil (Credit Information Bureau (India) Limited) tells us, ?The entire banking industry has honed in on the credit card and loan markets with great intensity. With so much competition amongst them, ones due diligence tests became lesser and lesser, which leads to people getting multiple cards and loans. While our task at Cibil has not been easy, over the last four years we have complied over a 125 million people’s credit history and status, creating a ready and available database. This data, while currently is only accessible to banks and financial organisations if their reason is valid, should soon, hopefully by the end of the year be made available to the public too. Then each person can check their credit records and see where they are straying and hopefully make things better. While this data has been at all the financial institutions disposable, due to their zealous efforts in converting more sales, they have slackened in looking at the people’s debt managing capabilities. The DSO’s and salesman try everything to make the sale, going to the extent of sometimes convincing customers to not disclose the fact that they have held other credit cards so they cannot check their credit rating with us.

The consumer is often desperate too, as he uses one card’s credit to pay the bill of another and tries to play around for as long as he can. The banks too share blame, for many banks issue credit cards to people, on the sole basis of the fact that they already own a credit card. However, such situations often turn out to be lose-lose situations for the customer and the bank?

The numbers of credit cards in India are over 30 million. This is thrice as much as they use to be 5 years ago, which only goes to show the sudden boom in this area. The amounts of unsecured loans and credit card defaults, which are over three months overdue, have risen to 15% of the total loans outstanding. This is a jump from the average 7-9% reports Crisil Ltd. The banking industry that has been reeling under the strain of bad debts are too approaching a cautious tone towards loans and credit now, having suffered the first backlashes of their haste this quarter. While the trap had been laid wide open, with warning signs shouting ?Danger? and ?Do not enter? for miles in each direction, we Indians who sometimes pride our wits to the extent of over smartness, walked right into it. How can we be as silly as Americans too live a life of debt burdens, loans and mortgages? How can some financial suits in a big bank swindle us? Well, the fact remains they did. They gave you money you didn’t have and hadn’t earn and at times didn’t even need, only to spend it on buying goods flooding our malls, which too have originated from all over the world and all this we lapped up without a whine. Now, when we find ourselves backed up in a corner, the question isn’t really about who out smarted whom, but who learnt the fastest.

No such thing as an easy loan

For generations we have feared loans like they have the devil within them. Each successive generation being wary from their past experiences. Today, things are different. The world as we see it is different and plastic money is a way of life. However, debt is not a solution unless you’re desperate, it is enticing and luring so beware.

These days, car and bike advertisements do not have the price shown, but the amount of EMI it would cost you to own one. The simple reason for doing so is to urge people who feel they can afford it, ignoring if they need it or not to take a loan and buy a product. It almost sounds like a conspiracy theory with bankers and manufacturers joining forces. However, the facts are real and all around us.

?People are now-a-days over leveraging themselves. It is not an uncommon sight to see youngsters with a new job, maybe in the BPO sector, driven by consumerism, to live beyond his means. Today, there are so many choices available to us, so many more things to spend money on, credit so readily available that there is often a complete lack of discipline seen in people’s financial management. Discipline is the key to managing one’s finances and debts well. With peer pressure looming large today, technology advanced to a state of wonder, temptation can set in easily, and slowly one credit card becomes two and maybe three when in search for the latest mobile,? explains Arun, who feels strongly about the stupidity we see today. However, he remains optimistic of the fact that things will get better.

Just like there are no free lunches in life, a loan is not meant to be easy. Shylocks never made it easy then and bankers do not do so now. The hardships that one may have to undergo in life due to emergencies are bad enough to keep most people saving for a rainy day. Where does the room to blow up money you have not yet earned seem logical? This is almost a way of bandaging yourself to be a labourer, who will soon start working off years of his life to pay off debt. All is not lost however. For us Indians are lucky enough to see the warning signs early. Also, the fact that the financial trauma has stung banks, corporations and people alike, each seem to be happy to get something out of the other and in this environment, the mistakes we have made with debt may not be as bad as they could have been.

Arun concludes, ?We have now, along with Trans Union, launched a credit scoring system, which should further the cause of due diligence in India taking it to International standards. The scoring will be between 300-900 points, covering all individuals who have had a credit card or have taken a loan for over 18-24 months.

The higher the score is, the better your rating will be when it comes to loan applications or credit card applications. The key points we consider while seeing a person’s credit is, whether he plays for time, i.e. rotates credit, delays payments or always has outstanding dues in his credit card bill due to rotation. The credit history of the person, defaults if any and how reliable are they based on the financial figures we see. Another key area we look at is the amount of credit limit a person regularly uses. If a person uses most of his credit limit each month, he gets a lower rating usually. The ideal amount of one’s limit to use is 30-40% barring emergencies of course. If the person seems to be in the habit of over-leveraging or has had any bad spates with other financial institutes over debt, then too a person’s rating is severely affected.?

Debt is a tool to be used and not misused. It has its good and bad points but if treaded on carefully can fulfill your need without leaving you scathed. Maybe ?debt defying? leaps do exist but why play with fire and hope not to get burnt?

How to manage debt effectively

Know your purse

Make a list of all the credit cards, loans and other debts you have and the monthly payments required for each. It?s important to know how much money you have to pay out each month so that you can budget accurately. A solid budget is the key to your get-out-of-debt strategy. Know how much you have and how much income you can reasonably expect in the near future.

Reduce the number of creditors

As a golden rule have as few creditors as possible. For many, a large part of their debt management problems arise because of the sheer number of creditors they have to pay. There?s the credit card companies, the utility bills, the car loan payment, the home loan payment, the student loan payment, and any other loans and advances you?ve ever take. Reduce your credit cards to the bare minimum, as ideally, you shouldn?t need more than one. Going for debt consolidation to try and swap loans or pay off some loans to consolidate it against one big loan is easier and cheaper.

Budget

Creating a budget might not sound exciting, but it is probably the only thing that can save you from utter chaos and financial meltdowns. Consider where you waste money and eliminate those actions. Be cautious with the power and your electricity bill will go down and save you money. Also, consider carpooling. You will save a lot of money on gas. Tally your expenses, then you can see how much money you have to pay each month to your creditors and how much money you have coming in. If you don?t have enough coming in to pay the bills then that is a problem. However, if your income is enough to pay your bills yet you are still struggling then you can probably handle this on your own with a little self-discipline.

Save and borrow only with caution

It is possible to build a money reserve that can cover several months? expenses if you run into financial problems. You never know when it?s going to rain (financially speaking). So, get in the habit of saving as much of your money as you can. At worst, you need to make sure you are saving at least 10% of your monthly salary. If you have to borrow then, investigate before you borrow. Look at borrowing as ?buying money?. Beware of the large print! No down payment, no-interest or low interest may look attractive but such offers frequently are filled with fees and penalties that can turn ugly. Always read the fine print!

Avoid new debt

As a first step towards debt management, you should avoid getting into new debt till the time the old dues are cleared in full. You?ll also need to be disciplined about paying the debt in time, especially when it comes to credit cards. Do not only pay the minimum due, pay the full amount as often as possible or it will come back to haunt you.

Clear high interest dues first

You need to prioritise your dues and begin clearing them as per the cost. Costlier or high interest dues, like credit cards and personal loans should be top priority to settle, as they charge more interest than a housing or auto loan even.

Refinance costs more

While refinancing ones debt is convenient and spares us agony in the short run, the only reason banks are so readily agreeable to this is as, by easing up your debt and prolonging your tenure, you ensure that you will pay more interest to the bank. While this is the most effective way of freeing money up and making loans more palatable, one should value the increased cost as well.

Debt consolidation

Debt consolidation is one of the first things one should do when facing extreme pressure from debt. It involves replacement of multiple loans with a single loan, hopefully with a lower EMI payment and a longer repayment period. Rather than paying off several separate bills each month, a consumer consolidates his/her debts with a financial institution that will arrange for one lower monthly payment extending over a period of time. While this method seems like a good idea, one should not resort to it unless they cannot pay off their dues in any other way, as this often leaves you more vulnerable.