Manage Your Debt Responsibly to Build Your Credit Rating

With borrowing rates at or near record low levels, many Americans are choosing to take advantage of the opportunity to borrow money.  However, if the recession taught us nothing else, it’s to remember not to take on more debt than you can handle.  That’s not to say you shouldn’t take on any debt, but the goal is to strike a balance of purchasing what you need and building credit without finding yourself stuck on an unaffordable mountain of debt.

Americans’ total borrowing rose 8 percent to over $2.73 trillion as of August this year, the latest month with total figures available.  That number is now actually higher than the total accumulated debt around the country before the recession began.  However, broken down, that number is not as overwhelming as it appears as total credit card debt is $855 billion of that overall total; still high, but far below the $1 trillion level seen before the recession began.

Daniel S. Hamermesh, a University of Texas economics professor has looked at the numbers and while still concerned, he says things are improving.  He says the ratio of household debt to GDP has fallen to 80 percent, a significant drop from the roughly 100 percent during the recession.

“We’ve been working off the debt,” Hamermesh reports.  But he also says debt can be healthy for an economy.  “Developed economies depend on the expansion of credit.”

The debt that comes from building credit allows Americans to purchase houses, begin a college fund for children to go to school, and most importantly the opportunity to build up a credit rating and a credit score.  Economists say the only way to prove credit worthiness and build a credit rating is to borrow money and pay it back.  It’s all about budgeting and keeping the debt reduction payments down to a smaller percentage of after tax income boosts your access to credit.

Once you have a good credit score you get to reap the benefits from it.  Paying off your monthly debts and avoiding the late fees not only builds your credit score but lowers the interest rates charged to your borrowed balance in order to make credit building more affordable.

With borrowing costs as low as they are, Hamermesh and other experts say there is opportunity. “It’s a good time to borrow if you can do it.”  But like any good professor, Hamermesh advises to find the balance and don’t take on more debt than you can manage.