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Before the introduction of readily available credit facilities it was quite easy to manage a budget, whether you had the money with you or not. Before every major purchase, enough time is needed to save enough money. Today, however, consumers are more concerned with available credit rather than savings account balances. While credit cards and loans seem to provide an inexhaustible source or cash, the truth is that even those with the best credit histories sometimes fall prey to overspending and are labeled as ‘overcommitted’ by credit reference agencies.
What could be the reason for the overcommitment? In very simple terms, overcommitment is when lenders believe you can safely repay more than your current income. Depending on your credit history, it can start with a mortgage and multiple credit facilities, but sometimes even a maxed out credit card can prevent you from borrowing more money. Every case is different and depends largely on three factors: credit history, income, and credit lines used.
How do you know that lenders have rated you as overcommitted? Well, the most obvious sign is someone else being denied credit. Like most financial services, the process is not transparent and gives banks the deciding power in this regard. Keep in mind that most lenders have different applicant criteria and even if you are accepted for a high-interest credit card or other loan, there is still risk involved. You might be overcommitting without even knowing it. Low income-to-credit ratios may not scare banks because they are taking calculated risks – but can you afford to be seriously overcommitted? Unless you have a really good repayment plan and money management skills, excessive commitment is a path to massive debt and even bankruptcy.
How to stop overcommitting? It’s actually that simple, pay off your debts or manage them to lower monthly payments and reduce the burden on them credit score, In the case of simple credit card loans, the best option would be to buckle down for a while or get an additional part-time job and pay off as much as possible. However, longer term loans can be more difficult to manage. Car loans, for example, while possible to refinance in principle – tend to be a fixed commitment because vehicles depreciate rapidly after purchase. Mortgages, on the other hand, can be refinanced fairly easily provided the borrower has enough equity to negotiate a better deal with the new lender.
As with debt, it is better to avoid overcommitment at all costs. Removing overdues from your credit history can be a tedious and time consuming process but it has to be done – so don’t put it off, act now.
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