Not long ago, I asked the WBC team to tell me what some of the issues members were facing were. I wanted to find out if readers were struggling with debt and credit problems.

A large number of members, I was stunned to hear, were struggling with debt.

Thinking over this result I came to this conclusion: WBC readers aren't immune to the debt and credit problems most of the world faces.

And that led me back to a thought I had after reading several letters from debt-strapped readers over a year ago: We have an opportunity to create added value to our business by developing a program to assist people with getting out of debt and repairing their credit ratings.

Debt Is a Serious Issue

Not all debt is bad, but all debt is serious.

In prior essays, I've explained that debt is a useful tool for building wealth when (a) it is not expensive and (b) you have a near-certain chance of using it to increase personal income and equity and/or business cash flow and long-term profits.

In future essays, I'll expand on this subject: the proper use of debt. But right now we are talking about how most people use debt - to finance lifestyles and purchase depreciating assets. Credit cards are a big part of that.

This sort of debt is bad. It is expensive. It erodes your wealth. But it also makes you poorer psychologically because it causes stress and anxiety, depletes your energy, and distracts you from profitable pursuits. This sort of debt is also the most common factor in marital problems.

Credit is related to, but different than, debt. Debt is what you owe, credit is what you can borrow.

You can be in debt and have good credit. You can also have zero debt and have bad credit.

Your creditworthiness is the measure of how likely you are to repay future debts. This is a valuable asset. You may believe you are creditworthy - and you may well be. But there are outside agencies that rate your creditworthiness… and banks and other financial institutions go to them-not to you-to determine whether they will lend you money and how much they will charge you for any loans.

Whether you know it or not, credit information bureaus (such as CIBIL, Experian, Equifax, HighMark) watch your credit behaviour quite closely and provide for a credit score which denotes our credit worthiness.

We may think this is not an issue in India yet, but it is becoming one. Lately, the Reserve Bank of India (RBI) has addressed this issue by specifically suggesting banks to use credit scores even to price loans optimally.

Credit rating agencies assess your debt and payment history and give you credit scores. A high credit score is good. A low credit score is bad.

The higher your credit score, the better. It will make it easier and quicker to borrow money if and when you want. And those loans will be cheaper.

The lower your credit score, the more difficult your financial life will be. It will mean higher monthly charges and less ability to take care of routine bills. Ultimately it may mean a downward spiral in the quality of your life.

What We Can Do to Help

I started the Wealth Builders Club to help “not-yet-wealthy” people achieve financial independence in seven years or less. Knowing that so many of our readers have debt and credit issues, we have committed to developing a comprehensive and effective coaching program to eradicate debt while simultaneously building good credit. As you know, one of my top rules for creating wealth is to become a little bit richer every year.

It's hard to do that if you have significant debt and/or credit problems. But you can do it. And you need to do three things simultaneously.

First, you must increase your income. I talk about increasing your income in my Creating Wealth essays, it gives you practical ways to make more money in the club's Extra Income Project series.

Second, you must use a good portion of that extra income to reduce your debt.

Third, you must decrease the amount of money you are spending on your current lifestyle (what we call your lifestyle burn rate).

Those will be the three key behaviors to remember while you go through our debt - and credit-coaching program.

The Benefits of Taking This Course

Here's what you can expect from this course…

We will help you address and resolve your debt problems - this is serious work. It will require some sacrifice, but it will be worth it. In the beginning, you will make progress in small degrees.

But things will speed up over time. This will be especially true if you are able to generate more income, as we will be urging you to do.

We will also talk to you to improve your credit scores… Not so you can rush out and borrow more money. But because increasing your credit scores will reduce the amount of money you need to spend on debt service every month.

The goal of this part of our coaching program is to gradually but steadily help you understand and raise your credit scores so as to qualify you for the best interest rates on your house, cars, investment real estate, and even business loans.

And you'll breathe easier anytime a situation arises for which you need good credit.

Our program will then show you how to maintain good credit scores going forward.

Know this: Reducing your debt and increasing your credit scores have similar results. They both lower the amount of money you send to other people every month. This keeps more money in your pocket. This money is what you'll use for saving, investing, and starting your own business. And that's how you're going to get richer every year.

How We've Structured the Course

This program will have two focal points.

One is a focus on debt. That's because debt is the root cause of many financial worries. By correcting your debt situation, we'll fix several financial problems at once (low credit scores and low savings rates are just two of them).

To start, we'll look at the role of debt in your life and where you are today. Then we'll give you a roadmap to help you get out of debt as quickly as possible.

We'll end our analysis of debt by covering a few instances in which debt can actually be helpful. I'll say no more about that now.

The second focus of this program will deal with credit; specifically, how to improve your credit scores… no matter what they look like today.

A company like Credit Information Bureau of India Limited (aka CIBIL) keeps all record of your borrower behaviour and will give you your credit score.

We'll work with our partners at PersonalFN to tell you the best places to get your credit reports and scores - without getting scammed or paying a fortune.

Finally, to complete the credit section, we'll give you a plan to maintain your good credit. It's important to keep scores high so that you receive the best credit rates and terms in the future. This alone can save you thousands of rupees each year.

If you follow the advice we lay out for you in this course, you'll be on your journey to getting (and staying) out of debt. And you'll be armed with the knowledge of how to achieve and maintain high credit scores.

But we realize it doesn't end there. Keeping your debts low and your credit scores high is a lifelong process.

That's why I want you to view this course as a reference manual. Come back to it and review the material over and over again as your circumstances change. This repetition will help cement the lessons.

Commit to taking action on everything we send you. Before long, you'll feel (and be) richer.

Best, Mark

P.S. I hope you're ready to commit to the action steps we'll give you. Many people think they are ready, only to find that they become discouraged and quit early in the process. After all, facing the reality of your debts can be difficult.

That's why, before you even get started, I'd like you to do a realistic assessment of your current situation: Where are you financially… and emotionally? That means thinking about your current state of indebtedness. Most people avoid thinking or talking about their debts at all, which is a major problem-it means, most likely, that they will never take the actionable steps that are required for getting out of debt.

Tell us about your issues with debt. Your responses will help us arrange this series to better meet our readers' needs.

Dear Wealth Builders Club Member,

Back in the day, Indians used to give each other blessings, 'may you always live happy,' 'may you live for a hundred years.' One of these blessings was interesting - 'may you never fall into debt'… never become a 'karzdaar'.

We were right to hate debt. Moneylenders would squeeze the lives out of us for the smallest of loans, with the cruellest of terms. It was a sure-fire way into financial hell.

Today, however, we have forgotten how evil it can be. We cavalierly pull out the little plastic moneylender from our pockets to charge every little thing in sight. But even though the credit card is more sophisticated than the local moneylender, it is as capable of gouging our eyes out.

According to a report of Dec 2014 on the National Sample Survey Organization (NSSO) survey of debt in India, nearly a third of rural households and a quarter of urban ones are indebted. The scale of indebtedness revealed is astonishing: between 2002 and 2012, the average amount owed by each family has jumped seven times in cities and more than four times in rural areas. About 22% of urban households were indebted and the average debt per family was Rs 84,625, up from Rs 11,771 in 2002.*

That's a lot of debt for us to be carrying around at any given time. That's why, before you even get started, Mark would like you to do a realistic assessment of your current situation: Where are you financially… and emotionally?

In today's essay of our new Debt and Credit Solutions series, our Partners at PersonalFN write to us about the rules to follow for healthy credit card use… and tips for maintaining a healthy credit score.

To your wealth, Anisa Virji Managing Editor, Wealth Builders Club

**

A couple of years ago, one of the readers of our website, Shyam, reached out to us. He wanted to meet with one of our investment consultants.

Since it was the first meeting, our investment consultant was eager to find out what his concerns were and see how we could help him deal with his finances.

The meeting started out well, the consultant started to understand Shyam's current situation, and his expectations from us. But in the course of the meeting, the consultant realised he had learned the root of Shyam's problems.

The 3 core mistakes of Shyam's financial life:

Mistake# 1: He relied too much on borrowed money

Mistake# 2: He often missed paying his dues on time

Mistake# 3: He had accumulated interest on interest, which in turn left him with a huge credit card debt

This all part of the same problem - he had borrowed too much money.

Yes, he had huge credit card debt. He received several intimations from the bank to clear his dues. The recovery team of the bank often called him for money.

The credit card is a two-faced friend - while it gives you a certain amount of freedom with your finances, and you can certainly enjoy the benefit of holding a credit card, it can easily turn around on you and put you in a financial hell.

If you choose to go down the dreaded card route, you must ensure that your increased spending is not stretching beyond your means; which, as in the case of Shyam, can jeopardize your long term financial wellbeing. He used his credit card wherever possible even if he needed to make a tiny payment at a grocery store. And things just got out of hand.

While we guided him on how he can settle his dues, we also told him about 6 rules that should be followed while using credit cards.

Rule# 1: Read all terms and conditions carefully before you opt for a credit card.

If you find anything in the terms and conditions of the credit card that was not conveyed to you, or is contrary to what was conveyed to you; seek a clarification from the bank. If you are not satisfied with the clarification, do not hesitate to cancel the card.

Rule# 2: It is important to be aware of the amount of annual fees that the bank is going to charge you each year.

This is one issue which credit card users often come across. Some banks also issue 'life time free cards' i.e. no annual fees are charged on usage of such card. However, it is best to double-check with the bank what the executive has promised. Don't go by his tall claims, which in most cases is - annual fees will be waived off, cash back offers, more reward points, etc. This will help you from any surprise in future. Do not forget, the annual fee will be levied even if you do not do a single card transaction in a year.

Rule# 3: Do not fall for minimum payment due.

Minimum amount is the amount that you need to pay for the purchases done in that month so as to not attract a penalty for default on payment of card dues. Our suggestion is that you should pay the entire sum on the due date, as carrying forward your payment to the next monthly cycle will lead to a higher amount due in your next bill due to high interest rates plus taxes levied on the credit card.

Rule# 4: Avoid payment by EMI.

Whenever you make a large purchase (usually over Rs 10,000, although the amount varies across banks) you may get an offer from your credit card issuing bank to opt for the EMI (equated monthly instalment) facility to spread your payment across several months. You should ideally give the EMI facility a miss as the interest on the EMI can be exorbitant. To put it simply, pay your credit card bill in totality before the due date in one go.

Rule# 5: Do not borrow cash.

You might have received calls from a tele-calling executive of your bank, making you aware that your credit card can not only be used for making purchases on credit but also for borrowing cash. While making purchases on your credit card (so long as you pay on time) is okay, borrowing cash on your credit card is a very expensive affair and hence must be avoided. It is a strict No-No! While the annual interest on cash borrowings may vary from bank to bank, it can be as high as 30% to 36% per annum.

Rule# 6: Miss the Insurance benefit.

Many credit cards are known to offer an insurance cover. You should ideally ignore this benefit and go for the core offering - credit card. If the card has features that suit you, then you can opt for it even if there is no insurance cover. This insurance cover is unlikely to be sufficient for you and more often than not is linked with many terms and conditions and may even be difficult to claim. Do you know, using your credit card imprudently may have a big impact on your credit score?

If you are one of the many people making use of your credit card to fund your shopping, entertainment, holiday spending, and not worrying about repayment; here are some facts to bear in mind that will keep your credit score healthy.

We will tell you how to be a smart borrower i.e. how to know your credit score, how to keep it high, or make it higher than it is, and give you 3 top tips to get out of too much debt and keep your credit score healthy.

Let's start…

But first, what is a Credit Score?

Your Credit Score is a score provided by a credit information company (for example companies such as CIBIL, Experian, Equifax, HighMark) to a prospective lending institution, that will tell the lender how good or bad a borrower you have been.

The clear indication is that the higher your credit score, the better a borrower you are. This means that you probably make your payments on time. Hence the lender who is ready to lend you money knows that he will face a lower risk of you defaulting on your payment schedules and vice versa. The lower your credit score, higher the risk that you will default.

Hence you should aim to always keep your credit score high. A lower score means that if you want a credit card or want to take a loan in future, you are probably going to face a difficult time. As the situation stands today, lenders will restrict you if your score is poor by possibly charging you a higher rate of interest on a loan, but sadly they are yet to reward those borrowers who have a high credit score.

Now how do you find out your Credit Score?

A company like Credit Information Bureau of India Limited (aka CIBIL) keeps all record of your borrower behaviour and will give you your credit score. You just have to follow the simple steps given on the CIBIL website.

There is a nominal fee of around Rs 470, which is non-refundable and you can have access to your credit report within 3 business days.

If your Credit Score is low, how do you fix it?

There's no shortcut here.

If you have a low credit score due to poor borrower behaviour in the past, you can still improve your credit score by paying your dues on time. Repay any pending dues and ensure that you do not default on any payments in the future. While this will take time, but your small steps will definitely help raise your credit score.

If you come across your credit report and find that your credit score is low, not due to past indiscipline but due to an error on the part of the lending institution or on the part of CIBIL, you should immediately notify both - the institution as well as the CIBIL.

Who can help you get out of debt and fix your Credit Score?

Some of you may not have even realised when you built up too much debt and now you don't know how to handle it. Your credit score is certainly suffering. Repaying your debt and emerging from the debt trap should be your first priority. Doing so will automatically improve your score.

You can even approach a good credit counselling organisation that can help you fix your debt situation. These organisations are typically non-profit organisations, so fees are minimal, if there are fees at all. Such credit counselling organisation can help create a debt management plan for you, help negotiate with the lender on your behalf, and even try and get you a lower rate of interest to repay your pending debt. Simply knowing that you are not alone in your struggle of repayment of debt, you will also receive some peace of mind.

You can contact a credit counselling agency you deem fit, to help you out for both situations i.e. correcting an error or getting out of a debt trap.

Now let us help you with 3 top tips we promised …

Your 3 Top Tips to Keep You Out Of Debt Trouble And Keep Your Credit Score Healthy

Tip# 1: Make your debt payments regularly and on time. This will have the most significant impact on your credit score.

Tip# 2: Try and avoid having more than two credit cards. This will ensure that you don't keep credit limits that you don't really require. Even multiple loans should be avoided.

Tip# 3: If you are planning to apply for a new credit card or a new loan, do it in a short span of time - don't drag out the process. If you stretch the process over months, it will look like you have spent a lot of your time seeking credit, which will reflect negatively in your credit report. Do your research quickly, and take the loan.

'Rather go to bed without dinner than to rise in debt.' - Benjamin Franklin

It is better to cut down on your expenses as far as possible rather than borrowing in order to pay for a kind of lifestyle that is well beyond your means. Make sure you don't take more debt than you can handle. You should have a proper financial plan in place. One of the many benefits of planning your finances is that it will show you how your cash flows are structured year on year, and accordingly you will know how much EMI you can afford to pay in the coming years.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

*Data sourced from: http://mospi.nic.in/mospi_new/upload/press_note_KI18.2r70_19dec14.pdf and http://timesofindia.indiatimes.com/india/22-of-households-in-cities-31-in-villages-are-in-debt/articleshow/45597822.cms

The Times They Are a-Changin'

Bob Dylan called it. Things are very different today than they were a generation ago. For one, today's generation spends a lot more than what our parents and grandparents did.

The cost of living has gone up, but a culture of credit-backed consumerism has played a vital role. Walk into a mall and the picture is evident: everyone swiping credit cards and opting for easy finance options - all the fancies of life without a second thought.

Along with rise in income, our aspirations have stretched bounds. We want to live in our dream homes, drive the latest fully-loaded sedan, take exotic vacations abroad, avail the plethora of lifestyle choices… We want it all, and we want it now.

However, without much cash available in the bank account, we fund it all with loans and access to easy credit… at the risk, of course, of personal finances going awry, very awry.

We're often unaware that credit information bureaus (such as CIBIL, Experian, Equifax, HighMark) watch our credit behaviour quite closely and provide for a credit score that denotes our credit-worthiness.

Here are some of factors they take into account when assigning a credit score:

Payment history Credit usage Duration of the account Type of loans (consumer, home, etc.) Number of enquiries to avail credit

Based on these factors, they assign you a score ranging between 300 and 900.

The higher the credit score, the better a borrower you are. As a responsible individual, you should try to keep your credit score healthy. This means you should make your payments on time. This tells lenders that there is a low risk that you will default.

If you maintain a low credit score, here are a few problems you may encounter:

You may find it difficult to get a loan in future Lenders may charge you a higher rate of interest Lenders may charge a higher loan processing fee

Why? Because a low credit score means lenders are exposed to a high risk of default.

So, how do you improve your credit score?

If your credit score is low, here's what you need to do…

Pay your credit card bills on time, and ensure that the outstanding amount is paid in full
Avoid payments by Equated Monthly Instalments (EMIs) on credit cards
Avoid withdrawing cash using a credit card
Do not opt for multiple credit cards or apply for multiple loans
Use your credit cards in moderation - set a monthly limit for yourself
Do not rely too much on borrowed funds
Pay your EMIs on time for all kinds of loans

Remember, when you close your loan account(s) in full, do not forget to obtain from your lender a closure letter or No Due Certificate (NDC), statement of account(s), original documents that you may have submitted to the lender, and remove lien on assets… all this would act as evidence for you and help you elevate your credit score in the future.

Once your loan accounts are closed, enquire with your lend to ensure they inform the same to the credit bureaus. If the lender has not intimated the closure of your loan account to the credit bureau, do it yourself (by writing to them and submitting the requisite documents as proof).

If you notice that your credit score is low due to an error on the part of the lending institution or the credit bureau, you should immediately notify both, the institution as well as the credit bureau.

By maintaining a good credit score now, you keep yourself eligible for cheap finance in future, when you might really need it.

Today, barring few large banks, most of the other banks are using flat loan pricing model wherein good credit behaviour is not incentivised and neither the bad ones are penalised. In India, credit scores have so far been used only to determine whether to accept or decline the credit application of the borrower. But lately, the Reserve Bank of India (RBI) has addressed this issue by specifically suggesting banks to use credit scores even to price loans optimally.

If banks start following this practice widely, bargaining with banks for cheaper loans based on your credit score might soon become possible for borrowers.

When negotiating a loan, in addition to your credit score, banks may also consider:

Your income and occupation Your saving account history Even your income tax returns for the past few years

It may seem invasive, but banks need a fair idea of your financial behaviour to determine their lending risk.

What if you are unable to fix your credit score by yourself…

If you’ve fallen victim to the debt trap, a host of credit counselling organisations can help. They may be able to help you with a debt management plan and even negotiate a lower rate of interest with the lender on your behalf. These agencies are typically non-profit organizations, so don’t worry about fees. They are minimal. Simply knowing that you are not alone in your struggle is a great relief.

Concluding points…

Taking calculated risk can be a good way to build wealth and meet certain life goals, but overindulging in credit and debt can be hazardous to your wealth and health.
Stretch within your means, and do not take leaps so long that they could jeopardise the financial well-being of your family.
To ensure you don't take on more debt than you can handle, have a prudent financial plan in place.
Remember: if you are a safe borrower, you will score well on your credit worthiness.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Ask Nobel Laureate Muhammad Yunus about the positive role that credit can play in the world and he'd hasten to tell you that credit can transform lives. A Bangladeshi scholar, entrepreneur, social leader, economist, and the founder of the Grameen Bank, Yunus believes that credit is a fundamental, universal right.

Yunus pioneered the concept of micro-credit in his country and around the world. He made eradicating poverty look simple. How? Empowering the poor through credit.

But what about creditworthiness?

As Mr Yunus teaches, we must prepare even the poorest person to handle debt confidently. Let's not forget so-called creditworthy companies have caused Indian banks trouble.

State of today's banking system: Those who need loans can't get them. Lenders chase those who don't need loans. The debt-averse eschew debt-creating opportunities. The debt-addicted ruin their finances and put the entire banking system at risk.

So how does one act sensibly and build wealth with borrowed money?

Moderation is the key. Too much of anything can be bad.

Greece is bankrupt because of high levels of debt at every stage of society. People borrowed beyond their capacities. Banks lent beyond their capacities, sometimes even leveraging their own positions. The introduction of the euro suddenly raised Greek purchasing power and supported unrestrained consumerism. Productivity and export competitiveness died slowly. Easy and borrowed money created asset bubbles only to get pricked badly.

If you only considered the state of Greece, you might conclude that all debt is bad. But Mr Yunus proves that even the poorest of the poor can use moderate debt to create wealth.

Greece's bad example teaches two important lessons about debt…

#1 Don't borrow beyond your capacity to repay.

You must ensure that you don't over-borrow and put a strain on your finances. Just as countries track their debt-to-GDP ratio, there is a similar way you can check whether you are over-leveraged – your debt-to-income ratio.

Debt to income ratio = Total monthly outgoings on liabilities (EMIs) Total monthly income from fixed sources

This ratio tells you the proportion of your monthly income you spend on servicing your debts. Ideally, it should not be more than 0.35 (or 35%). The more you exceed this number, the more strain you put on your income.

So, before taking a loan, assess your monthly income and expenses to see how much additional outflow you can afford. This will help you decide how much loan you can comfortably handle.

#2 Don't borrow to fund luxuries or speculation.

Never borrow to buy luxuries such as posh cars, iPhones, or holidays. And never borrow to play a horse race or gamble in a casino or even to speculate in stock markets. If you lose money in betting, you have to service your liability without having made a single rupee.

But do not shy away from borrowing for productive purposes or to create productive assets. This is the single most important factor you must consider while borrowing: Will this debt fund productivity?

If you borrow to start a business, your business should generate cash flows and help you service your debt.

If you purchase a house with borrowed money, besides earning rents, you may also enjoy capital appreciation, which you use to pay down the debt.

Mind the cost of borrowing

Loans that don't require collateral for approval are usually costly. This is why personal loans cost 14%-16% per annum, whereas home loans, although floating, charge interest of about 10%-11% per annum.

If you are buying a house to live in, you may only bother considering the affordability of the house and your capacity to repay the loan on time. But if you want to create an asset, such as a business or a second home, you must make sure that your expected cash inflows from the asset exceeds the cost of the loan. If you can manage this, a loan becomes a powerful tool of wealth creation.

For example, if you want start a business, you must assess not only how much capital (that is, debt) you need to fund the venture but also how long it will take you to break even with the cash you generate from the business. If the gestation period of the business is short and your risk capacity is high, borrowed money may help you create wealth. On the other hand, if your potential business is going to take a long time before it pays off, borrowing too much up front may be a bad idea.

Similarly, when you buy a property with borrowed money, you must factor the scope for further appreciation in that locality and how long before tenants can occupy the space. If demand outpaces supply, your property will appreciate. And completed, ready-for-possession properties carry less risk and can generate cash inflows through rents immediately, helping you service your loans comfortably.

Now…if you have concluded that borrowing to invest in stocks to make higher gains than the interest on your debt, you are mistaken. Equities are far more volatile than the real estate, and Indian markets are largely driven by foreign investors, who aren't much different than Flamingos: They come in search of food, and when they have enough, they return home. Or a crisis back home may force them to flock back immediately.

Don't assume that just because you are borrowing in the hope of asset creation (rather than luxury) it's a good idea. Borrowing to play the stock markets is more like borrowing to bet on the horses. We're not saying you shouldn't invest in the markets or that the Indian markets don't offer great wealth creation potential. However, they are far too volatile and carry far too much risk to merit borrowing to fund your stock investments.

Are you prepared to borrow and become rich?

Mohammad Yunus and Grameen Bank changed the fate of thousands of beggars in Bangladesh by providing moderate loans to fund genuine wealth creation. Creating wealth with borrowed money is certainly possible. You won't build wealth if you borrow to fund luxury or speculation. However, moderate, mindful debt used to fund productive purposes has the power to transform the world.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

'My life is an EMI,' said Mr Desai as he began a consultation with one of our investment advisors.

'Could you elaborate?' asked the advisor.

'Well, practically whatever I've bought for this house [where we are seated], including the house itself, I've bought on credit. This 50 inch 3D LED TV, the home theatre and sofa sets, my iPad, and many other things for my family, I've bought on instalments,' he told us as he pointed around to the various comforts he and his family enjoyed.

Our advisor looked concerned. But then Mr Desai said…

'But now I want to get my house in order for the financial well-being of my family. I have two little daughters studying in a good school, and I want to provide for their higher education in whichever stream they choose and get them married in style. I want to fulfil all my responsibilities wisely and eventually live a blissful retired life.'

Our investment consultant then provided a few wise words on financial planning, and Mr Desai decided to enrol in our personalised financial planning service to correct course before it was too late.

In our era of consumerism and competition, we all have aspirations. But we do not all realise that we might be aspiring, consuming, and competing beyond our means.

Home theatres, huge TVs, tablets, laptops, mobile phones, lavish interior decor…perhaps all of it was bought on credit. Finance options are readily available in the form of easy EMIs and credit, and they are designed to lure us into the debt trap.

It's one reason malls and electronic shops are seeing a good footfall. Customers gush over discounts, and the shops are eager to promote them. This, of course, is just another lure. The offers make us think we're saving money, but they are merely another lure designed to encourage us to exchange our long-term financial well-being for items we don't need.

'If you buy things you don't need, you will soon sell things you need.' - Warren Buffett

Credit has a way of becoming a habit, and spending can easily turn reckless. It's easy to get caught in the debt trap. But indulging in the occasional shopping spree can harm your long-term financial health. And it can derail your most important financial goals, such as your children's education, their marriage, and even your own retirement. And sadly, unlike Mr Desai, not every one realises they need to correct course before it's too late.

It is vital to ensure your spending habits do not affect your priorities. Here are some tips to avoid reckless spending…

Determine you monthly budget

To do this, you must first list your financial goals. Then determine when you want to achieve these goals and how much money it will take. Don't forget about inflation! The next step is to calculate the amount you'll need to save every month, taking into account the rate of return on investments. These figures will help you determine your monthly budget.

Plan for personal expenses

To avoid indulgent purchases, you need to account in advance for your family's personal expenses such as clothes, accessories, etc. Include these expenses in your budget, and make sure all family members stick to it. It is smart to purchase items that are on sale, but don't let these marketing strategies entice you into buying unnecessary items you didn't plan to buy. If you are having trouble saving for your financial goals, explain the situation to your family. Only when they too recognise the situation will you be able work together towards reducing your overall family expenses.

Plan for household expenses

Apart from personal expenses, your budget should also plan for all household expenditures. All shopping trips must be well planned so as to save on transportation costs. When grocery shopping, account for spoilage…and make sure your family doesn't waste food. Likewise, ensure that fans and air-conditioners are used thoughtfully. Same for mobile phones and data plans.

'Don't save what is left after spending; spend what is left after saving' - Warren Buffett

Find an alternate source of income

Sometimes reducing expenses may not be enough to correct course after years of particularly damaging spending. And so you might also need to find an additional source of income. Even if you are already working full time, you might need to take on a part-time job to make up for past recklessness. Perhaps you will need to become a dual income household with both spouses earning an income.

The idea here isn't complicated: reduce expenses and increase savings. But correcting course does require discipline. Just remember that it's all in the interest of you and your family's long-term financial well-being.

Now, if your bad spending habits have led to deep credit card debt, here is a five-point approach you could follow…

Assess all your credit card dues: The first step to eliminate your credit card debt is to evaluate all your obligations. Take note of all the credit cards you own, analyse your online accounts and paper bills, and the interest rates applicable on each card. This will help you to determine the total amount you owe and the cards that bear the highest rate of interest, which are the ones you should pay off first so as to save on interest payments.

Renegotiate the rate of interest on your credit card: You can try to reduce the interest rate you are paying on your credit card by contacting each credit card company. Even if you manage to reduce the rate by a small percentage, it can help you save a huge amount on interest payments. Your credit card companies may or may not renegotiate interest rates, but there is no harm in asking.

Create a budget to pay off your credit card dues: In addition to your budget for household and personal expenses, you will need to account for credit card debt repayments. Include in your budget the exact amounts you will pay off each month. You might need to prioritise these payments over your personal and household expenses. Meaning you may need to eliminate outings or ration your 'essentials' such as electricity and mobile use. It goes without saying, but don't add to your debt with unnecessarily credit-fuelled shopping sprees. If you have extra credit, don't give in to the temptation to use it. It will only lead to unnecessary purchases and put you back where you started.

Utilise windfall income to repay your debts: Any windfall gains, such as lawsuit judgments, inheritances, divorce settlements, insurance settlements, or retirement packages, should be used to pay down your debts. Even if you had other plans for this money, it is wise to repay your debts first if you want to boost your financial health and meet your longer-term financial goals.

Implement your debt repayment strategy: Once you have determined a method to budget your expenses and pay off your dues, you must start to implement it. Do not delay or procrastinate these payments, as the interest will only mount higher with every passing day. It is also prudent to keep a track of your progress. Revisit your finances regularly to ensure that you have not deviated from the plan.

A debt-free life is achievable. But it takes practical planning and a bit of discipline. As Dave Ramsey, a personal money management expert, likes to say, 'Live like no one else now…so that you can live like no one else later!'

If you feel yourself slipping into the debt trap, don't hesitate to seek the guidance of a financial expert or credit counsellor. Typically non-profit organisations, their fees are minimal…if any at all. And a good credit counselling agency will create a personalised debt management plan, negotiate with the credit card companies on your behalf to get you a lower rate of interest, and perhaps best of all, provide you with peace of mind knowing that you are not in it alone.

At PersonalFN, we hope that you will keep all this in mind the next time you go on that credit-fuelled shopping spree.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

Ask your dad if, before your time, he used credit for everyday purchases and I'm sure the answer will be no. Traditionally, Indian consumers have been averse to buying on credit. But that was the past.

Today is the golden age of plastic…'plastic money'!

Now, thanks to credit, the fancies of life are available before we even earn an income. Gadgets, appliances, accessories, bikes, and more! But, as American humourist Evan Esar said, 'A batch of credit cards fattens a wallet before it thins it.' It's all fun until you have to foot the bill.

Credit cards aren't inherently bad, though. It's about how you use them. If not prudently, it's all too easy to fall into the credit card trap and ruin your financial health.

Here are some points to keep in mind when selecting the right credit card for you:

Credit limit

Your credit limit is the maximum amount you can spend on a credit card. If you are a first-time card user or an avid spender, it's better to opt for a card with a low limit, say Rs 15-20,000.

Be aware that sales personnel from banks may try to push a higher limit on you. While you may indeed deserve one, just remember that a higher limit could permit you to spend beyond your means. This is how the credit-debt trap begins.

Some lenders allow you to exceed the credit limit subject to terms and conditions, but it's best not to indulge in this unless there's a dire need.

It is possible to borrow cash from your credit card, but the interest rates are very high and can damage your financial health. It's best to avoid cash advances unless, again, the need is dire.

Interest rates

When shopping for a credit card, research the interest rate the bank charges for partial and delayed payments. Normally, the interest rate levied is 2% to 3% per month. To avoid paying higher interest and falling into the trap, it's ideal to pay your dues in full and on time every month. Also be aware of any annual fees or other fees attached to the credit card and do a comparative analysis of different banks.

Annual fees

Check if the bank levies annual fees or charges to use the card. If so, look into having them waived. It is common for banks to waive the annual fees / membership fees for the first year. In the second year, fees could be applicable. It's possible to be promised a fee waiver for the second year as well, but you must authenticate this claim with the bank directly to circumvent a 'mis-selling' trap.

Lifetime free cards

'Lifetime free credit cards' are relatively new. While there was a time when most banks charged annual fees on their credit cards, annual fees are being phased out. In effect, clients are offered 'lifetime free cards' - that is, no annual fees for life. Again, double-check any telesales personnel promises with the bank.

Grace period

Another factor to evaluate is the extra time or grace period the bank offers you to pay your outstanding dues without interest. The longer the grace period you have, the better. This can offer a cushion, though it's better to pay off the outstanding dues before you need the grace period.

Rewards and incentives

These days, most credit cards offer reward points and incentives on purchases or dining out that can be redeemed or used at a later date.

For instance, some credit cards allow you to redeem reward points at certain stores or shopping centres. If you are a frequent shopper at these outlets, then consider a card that offers rewards there. Likewise, if you are moviegoer, opt for a card that offers reward points on entertainment. Analyse your spending habits to determine which card suits your needs best.

Irrelevant benefits

Banks smartly advertise their credit cards by adding on auxiliary services and products these days, however be astute enough to assess whether this makes sense to your needs and lifestyle. It may happen that various benefits are offered, like an insurance cover coupled with the credit card, but makes little sense if you already have an insurance provider. As attractive as they might be, be wary about such offerings because the core utility you're looking for is the benefits of a credit card. If a card has features that suits you, opt for it even if there is no insurance cover or other add-ons.

Terms and conditions

Remember, the devil is in the fine print, so take the time to read the terms thoroughly. Unfamiliar terms and conditions can jeopardise your financial well-being. If you find anything, jargon or otherwise, in the terms and conditions section that was not conveyed to you or is contrary to what was conveyed to you, seek a clarification from the bank and avoid taking or using that card.

Once you begin to use the card, it is assumed that you have read the terms and conditions and have agreed to them.

Choosing the best credit card for you is just the first step. How you use this plastic money will determine your long-term financial well-being. Here are few tips to empower you:

Have a budget and spend within your means

Avoid converting large purchases to EMIs

Pay-off your credit card dues in full and on time

Claim waiver on annual fees by keeping a good repayment record

To swipe or not to swipe? That's the question. It's all very simple: Be a wise spender and use credit cards with caution. Avoid opting for many credit cards as it could cause a debt storm if you aren't careful.

PersonalFN believes that owning a credit card can be convenient as long as you have the means to pay off your dues every month.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

A leap of faith can change one's life. But the impact of the change depends on how, when, and from where you jump.

Jumping up and down is excellent cardiovascular exercise. Jumping into a swimming pool is great fun. Bungee jumping is a real thrill. But every jump requires prudent safety measures…no matter how strong your faith. Faith and reason are not mutually exclusive.

Entrepreneurs looking to take a leap of faith in their business should also enact safety measures…no matter how confident they are about their business.

What separates a successful business from an unsuccessful one? Good judgment regarding risk. Launching a new product is as much of a risk as it is an opportunity. And taking a business loan can be a double-edged sword. If the funds are used productively and prudently, they could provide the springboard your business needs. Without careful planning, however, borrowing on a whim or during a crisis is the like bungee jumping without a harness.

Before you apply for a business loan consider:

Why you need funding How long it will take to pay it back Entrepreneurs might borrow for many reasons - from business expansion to working capital requirements. But it is best to borrow to scale up existing business activities or to start new ones. Borrowing to run an existing business should be a last resort. Ideally, a business operates on the cash it generates. Regularly borrowing to sustain your business will cause difficulties sooner or later.

That said, borrowing to expand your business does not automatically make the loan less risky. But it does give you a higher purpose.

Before you apply for a business loan, you need to know how you will earn additional profits to be able to service and retire the loan. Be clear with your business plan. Predicting future cash flows is extremely complicated. And it's not what you aim to earn; it's what your business is capable of earning, which depends on…

The economy Your industry Demand Competition Regulations Common Mistakes When a businessperson starts getting more orders, they tend to become bullish about their business and highly motivated to expand. One more product…one more store…one more market…and so they borrow - sometimes more than they should.

All-out expansion can be risky. Imagine this: After a boom in the automobile industry, a small auto-component maker thinks about doubling his capacity. His business has a reasonable surplus and little debt. He has an aggressive expansion strategy that he's confident he can implement. A bank grants him a loan. But the automobile industry enters a rough patch just as the expansion nears completion. A double whammy: The business has invested heavily in new capacity, but now even the pre-existing capacity is underutilised.

We do not wish to encourage pessimism but a 'wait and watch, slow and steady' approach.

Smart Borrowing is Simple Before you calculate how much you will borrow, you must understand industry trends and dynamics. The pricing power of producers and service providers in your industry is a good signal of the pace of activities. It's the job of the entrepreneur to judge how long that pricing power will last.

More competitors and less demand can puncture the industry wheel. Avoid borrowing when the balance sheet shows all-time high margins and revenues. That's often the end of a cycle. True, not all businesses are cyclical, but demand-supply dynamics are not constant, and no industry is immune to change.

Keep in mind that a strong business with a promising future will always be able to find a financer. If a conservative bank refuses to lend, there may be a lacuna in your analysis. Consider the bungee instructor who prohibits an obese person from jumping. Banks, prudent banks, serve a similar function. They will not let you jump to your death. It's not good for business.

So hash out the details again. But don't waste time on elaborate project reports. Coaxing a loan from a bank through affected presentation may get some success, but it's detrimental in the long run. A loan proposal that is strong at core will see the most success.

When you propose a loan to a bank, they will want to know your:

Personal credit history Trade credit history Business cash flows Collateral security Firm's net worth If you or your business score low on any of these items, a bank will be reluctant to lend you. So before you apply for a loan, take a 'business fitness test'. And don't jump unless you are fit.