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Buying on credit has become such an
accepted way of life in our society
that many individuals look upon credit
as a right. Credit is not a right
or a license to spend. It is a
privilege and a serious responsibility.
Credit is extended through a loan
document or a plastic card. Credit
is debt. You use credit whenever
you pay tomorrow for goods or services
you are enjoying today.
Used properly, credit can be a
helpful financial tool — allowing
you to leverage money that has been
loaned to you to make purchases
that will grow in value or generate
future income. Some credit, or debt,
is actually good and worth taking on
if you can afford it. For example, a
student loan is an investment in your
future earning ability. A mortgage
loan generally is an investment in
an asset that you expect to grow in
value. An added bonus — the loan
interest charges you pay may be tax
deductible on your federal income tax
return for some student loans and most
mortgage loans.
Used improperly, credit can lead
to financial trouble. It is easy to
lose track of how much you are spending
when credit is used for vacations,
dining out, clothing or gifts. Try to
use credit only if you can pay your
account balance in full each month.
Healthy Credit Habits
It is important to establish
healthy credit habits.
- Set a monthly limit for
charges and follow it.
- Pay credit card bills on
time and in full to avoid
finance charges.
- Do not skip a payment.
- Limit the number of credit
cards you own.
- Know the terms and conditions
of your credit card(s) and loan(s).
If you have questions, ask for
an explanation.
- Keep credit card and loan
information in a safe place.
- Keep copies of sales slips
and compare charges when your
billing statements arrive.
Call your company immediately
if you find a discrepancy.
Compare Credit Carefully
Credit cards offer a variety of rates,
terms and features. Two cards, both
with the same name, may offer very
different features. Each financial
institution that offers credit cards
establishes its own terms. Be cautious
of credit cards that start charging
interest on items you buy the day
each transaction is posted to your
account. You pay interest on all
purchases with this type of card.
Compare options carefully.
- Annual percentage rate (APR) — the rate of interest you will pay annually.
- Fees charged by the card issuer — such as over-limit fees, annual
fees or cash advance fees.
- Grace period — the amount of time you have to pay before interest is charged.
- Other benefits — such as frequent flyer miles or access to an automated teller machine (ATM).
Your Credit Reputation
By practicing healthy
credit habits, you can build a good
credit reputation which will result in the following.
- You have a better chance of
being approved for credit when
you need a credit card,
vehicle loan or mortgage loan.
- You are more likely to receive
higher loan amounts at lower
interest rates.
- You are more likely to get
a desirable job, secure an
apartment and acquire insurance
coverage. Employers, landlords,
insurance companies and other
businesses may review your credit
history during the application process.
Build a good credit
reputation.
- Maintain active checking and savings
accounts with no checks returned
for insufficient funds. This demonstrates
that you can manage money well
and have the discipline to save.
- Apply for a small, secured loan
or credit card from your financial
institution, backed by your savings
account. Use it carefully and make
payments promptly. Paying small
credit transactions responsibly
establishes your creditworthiness.
- Limit your debt. Financial planning
professionals recommend keeping
your personal debt-to-income
ratio at or below 20 percent, excluding
mortgage or rent. Calculate your
debt-to-income ratio using the formula below.
| Debt-To-Income Ratio |
Total monthly payments (exclude mortgage or rent)
÷ Net monthly income = Debt-to-income ratio
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Example: If your monthly payments
equal $400 and your monthly net income
is $2,000, your debt-to-income ratio equals 20%.
$400 ÷ $2000 = .20 or 20%
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Use the Debt
Danger Signals to help you
assess if you are managing debt appropriately.
Getting Out Of Debt
Once you become overextended,
it is not easy to get your spending
under control. These tips will help
you get back on track.
- Pay more than the minimum
payment due on your credit card
balances. Start with the card
having the highest interest rate
and pay as much as you can until
the balance is zero. Continue
until all balances are zero.
- Close all of your high-interest
credit card accounts except
the one with the lowest interest
rate. Use it for emergencies only.
- Use a debit card instead
of a credit card. Because the
money is taken directly out of
your account, you are spending
money you have, not increasing
your debt.
- Pay bills on time to avoid
costly late fees and high
interest charges.
- Take advantage of free and
low-cost credit advice from
sources such as the National
Foundation for Credit
Counseling.
- Avoid payday loans.
| Avoid Payday Loans |
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A payday loan may appear to be
a short-term solution to a temporary
cash-flow problem. In actuality,
a payday loan is typically a high-interest,
high-fee loan which can quickly develop
into long-term debt. The excessive use
of payday loans can lead to a
pattern of debt and dependence.
Payday loans usually range from $100
to $1,000 depending on state legal
maximums and are repaid out of your
next paycheck (usually occurring within
a 2-week period). Problems arise
when your next paycheck is already spent
and you are faced with an emergency.
Cash-strapped consumers run the risk
of becoming trapped in repeat borrowing
due to triple-digit interest rates,
unaffordable repayment terms and coercive
collection tactics. Interest charged
can be as high as $25 on a $100 loan
usually for a two-week period and
penalties for extending the repayment
of your loan can be severe.
Calculate the actual cost of
the payday loan — it may change your
mind about taking the loan.
Even though getting a payday
loan is relatively easy, you need
to know the following.
- Some payday lenders take
a post-dated check for the
loan amount and interest.
The borrower must then come
in to renew the loan or be
prepared to cover the check
when it is presented for payment
at your bank. Failure to repay
can lead to overdraft fees from
the lender and the borrower’s bank.
- Returned checks can cause negative
remarks to be placed in check
clearinghouses, which will make
it difficult to open deposit
accounts in the future.
- Basing payday loans on personal
checks leads some lenders to
use coercive collection tactics
if the loan is not paid in full.
Some lenders threaten legal action
if the borrower fails to cover
payday loan checks. In some states,
lenders can sue for multiple damages
under civil bad check laws.
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| There are alternatives to payday loans.
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- Establish and follow a
realistic budget. Know what your
monthly net cash flow is and plan
your expenditures accordingly
based on your income.
- Create an emergency fund —
even small deposits can help
to avoid borrowing for emergencies,
unexpected expenses or other items.
- Research the interest rates
on loans offered by your financial
institution, which can be more competitive.
Consider overdraft protection
for your checking account.
- Contact your local consumer
credit counseling service to
help you establish a debt repayment
plan with creditors.
- As a last resort, discuss an advance
in pay with your employer or a
small loan from family or friends.
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Basic Money Management
Basic Money Management
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