What is financial commitment

Before the advent of readily available credit facilities, budget management was fairly simple, you either had the money or you didn’t. Each major purchase was preceded by a sufficiently long time to save enough money. Today, however, the consumer is more interested in the available funds than in the account balance. While credit cards and loans offer seemingly endless sources of money, the truth is that even those with the best credit histories sometimes fall victim to overspending and are labeled “over-indebted” by credit bureaus.

What can over-indebtedness cause? In very simple terms, over-indebtedness is when lenders believe you’ve borrowed more than your existing income is safe to repay. Depending on your credit rating, mortgages and multiple credit facilities can trigger this, but sometimes even a maxed-out credit card can prevent you from borrowing more money. Each case is different and depends largely on three factors: creditworthiness, income and credit lines used.

How do you know the lenders have classified you as over-indebted? Well, the most obvious sign is that any further credit is denied. As with most financial services, this process is not transparent and leaves a lot of decision-making power to the banks in this regard. Remember that most lenders have different eligibility criteria, and even if you’re accepted for a high-interest credit card or other loan, there’s still a risk. You may be overwhelmed without realizing it. A low income-to-credit ratio may not deter banks because they take calculated risks – but can you take the risk of seriously overcommitting yourself? Unless you have a really good repayment plan and money management skills, over-indebtedness is a two-way street to massive debt and even bankruptcy.

How to stop being overwhelmed? It’s really very easy to pay off or manage your debt to lower monthly repayments and ease the strain on your credit score. With simple credit card debt, the best option would be to tighten your belt for a while or get an extra part-time job and pay off as much as you can. However, long-term loans could be more difficult to manage. A car loan, for example, can theoretically be refinanced – but turns out to be a rather static commitment because vehicles quickly lose value after purchase. Mortgages, on the other hand, can be refinanced quite easily, provided the borrower has enough equity to negotiate a better deal with the new lender.

Just like with debt, over-commitment is better avoided at all costs. Removing over-indebtedness from your credit history can be a tedious and lengthy process, but it must be done – so don’t put it off, act now.