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Credit in a Money World

Image representing the 'Credit in a Money World' one pagerCredit makes our world go round, makes global commerce possible, and presents for consumers a tantalizing array of options never available to their ancestors. Although credit cards have been around for less than half a century, in that time they have transformed the way in which consumers operate.

 


Assessing Your Current Debt Status

The use of credit can make your money management system function smoothly or keep you awake with nightmares. This depends on whether or not you keep your credit use under control. People in different situations can handle more or less debt than others. As credit has become easier to obtain, it has become easier for people to over commit themselves.


Steps to Wi$ing Up - Step 4-1. Calculate Your Debt-to-Income Ratio

How do you know if you are carrying “too much” debt? A good place to start is to calculate your debt-to-income ratio. This is basically the percentage of your take home pay that goes to pay non-mortgage debt. Complete the following steps to determine your ratio.

Step 1. List all of your loans (auto, student, furniture, personal, etc., except mortgage loans) and credit cards and the amount of the monthly payment.

Step 2. Divide the total amount of your monthly payments by your total net pay (take home pay after taxes and deductions). For example: $525 ÷ $2500 = .21 debt-to-income ratio.

To locate the nearest Consumer Credit National Foundation for Consumer Credit (NFCC) at 1-800-388-2227, or visit their website at www.nfcc.org.

Another way to assess debt is to look at the type of debt you have. Some people refer to “good” debt and “bad” debt. They refer to debt used to buy homes, cars, and to pay for education in the generally “good” category. Your Credit History - It Really Does Matter


Steps to Wi$ing Up - Step 4-2. Evaluate Your Credit Reports

Contact the credit-reporting agencies and request a copy of your credit report.


Steps to Wi$ing Up - Step 3.2. How Do You Communicate?

Good communication can lead to success through a process for determining goals; developing a shared vision; and reaching agreement in how to spend, save, invest, or give away money.


Managing the Use of Credit

Credit is a convenient financial tool. If you use or plan to use credit, it is critical to understand how it works and know the reality and responsibility of repaying your debt.

  • Make a budget, and stick to it.

  • Set personal and family limits on credit use to keep from charging more than you can afford to pay off at the end of the month.

  • If you can’t pay the balance in full each month, pay more than the minimum.


Steps to Wi$ing Up - Step 4-3. How Are Your Finance Charges Determined

Have you read the fine print in your credit card member agreement lately? Do you know which method your credit card companies use to determine finance charges?

1. Make a list of all your credit card accounts.
2. Locate the card member agreement for each account —it’s the one with the small print! Next to each account, indicate which method is used to calculate finance charges. Don’t have the agreement? Call the company and ask how finance charges are determined.

Paying Down Your Debt

If you are looking for ways to pay off your debts —especially credit card debt —the first step is to stop taking on additional debt! This means stop using your credit cards.

Establishing Credit

If you don’t have a credit history because you have never had a credit card or taken out a loan, there are steps you can take to begin to establish credit.

  1. Make sure you pay all of your bills on time.

  2. Open a checking or savings account in your name.

  3. Apply for a charge account in your name at a local department store. Only charge what you can pay off each month.

  4. Take out a small loan. Make the payments on time. Don’t pay the loan off early. You want to show that you can make payments on time.

  5. Open a secured credit card account. With this type of credit card, you deposit money with the card issuer that will be used if you don’t pay your bill.

How to Shop for Credit

Whether you are shopping for a loan or a credit card, it’s important to shop around. Look for the following terms and conditions when shopping for a credit card. These must be disclosed in credit card solicitations. Do research on the annual fees and Annual percentage Rates (APR). Learn the differences between the APR fixed or variable.

Problems with Credit

Many people face financial crises at some time in their lives. The fact of the matter is that your financial situation doesn’t have to go from bad to worse.

Take control of your financial situation; Examine your budget and ways to bring in additional income. The goal is to make sure you can make ends meet on the basics: housing, food, health care, insurance, and education. Contact your creditors immediately if you are having trouble. Visit www.nfcc.org to find a credit-counseling service office near you. For help in evaluating a consumer credit counselor, see www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm.

Protecting Your Financial Identity

Identity theft is one of the fastest-growing types of financial fraud. Identity theft occurs when someone uses your personal information, without your permission, to open fraudulent accounts or commit other crimes (like giving your name when they are arrested).

If you begin to notice that your bills are not arriving, you have unauthorized withdrawals or charges on your existing accounts, are denied credit, or begin to receive calls from bill collectors for goods or services you didn’t purchase, you may be a victim of identity theft. There are several steps you should take immediately.

  • Request a copy of your credit report to check for unauthorized accounts.

  • Immediately file a police report..

  • Contact the fraud division of the credit bureaus, and request that a Fraud Alert be placed on your credit file.

  • Close any accounts opened fraudulently or that have been tampered with.

  • File a complaint with the Federal Trade Commission (FTC). They track identity theft cases and share information with other federal law enforcement agencies. You will also want to complete an ID Theft Affidavit (available at www.consumer.gov/idtheft).

The FTC ID Theft Hotline may also be of assistance at 1-877-IDTHEFT.

The Action Plan is a critical exercise that will help you turn the lessons learned in this chapter into action steps.

My action plan for Credit and a Money World is to examine my use of credit and to reduce my overall debt.


1Source of Computation: Financial Responsibility Leader Guide, American Express, page 8, 1993.