Before the introduction of easily available credit facilities managing budget was fairly easy, you’ve either had the money or not. Every large purchase was preceded by adequately long period of time required to save up enough funds. Today, however, consumers are more concerned with available credit rather the balance of savings account. While credit cards and loans seem to be providing a bottomless source or cash the truth is that even those with best credit history sometimes become victims of overspending and are labeled by credit referencing agencies as ‘overcommited’.
What can cause overcommitment? In very simple terms, overcommitment happens when lenders believe that you’ve borrowed more than can be safely paid off with your existing income. Depending on your credit history this could be triggered by mortgage and multiple credit facilities but sometimes even a maxed out credit card can prevent you from borrowing any more money. Every case is different and largely depend on three factors: credit history, income and used credit lines.
How do you know that lenders labelled you as overcommited? Well, the most obvious sign is being refused any more credit. As with most financial services, this process is not transparent and leaves banks much decisive power in this respect. Keep in mind that most lenders have different applicant criteria and even if you have been accepted for a high interest credit card or other loan there is still risk involved. You may be overcommited without realizing it. Low income to credit ratio may not scare banks off because they’re taking calculated risk – but can you take the risk of becoming seriously overcommited? Unless you have a really good repayment plan and money management skills, overcommitment is a one way road to massive debt and even bankruptcy.
How to stop being overcommited? It’s very simple really, repay your debts or manage them to lower monthly repayments and lessen the burden on credit score. In case of simple credit card debts the best option would be to tighten the belt for a while or get an extra part time job and repay as much as possible. Long term loans could be more difficult to manage though. Car loan, for example, while possible to refinance in theory – turns out to be a rather static commitment because vehicles depreciate rapidly after purchase. Mortgages on the other hand can be refinanced quite easily providing that borrower holds enough equity to negotiate a better deal with new lender.
Just like with debt, overcommitment is better avoided at all costs. Removing overcommitment from your credit history can be a tiring and lengthy process but it has to be done – so don’t leave it for later, act now.