Thursday, October 19, 2006
The road to winning credit - Consumer Credit Part 3 of a Series
Keeping yourself on track takes planning, practice and loads of discipline
NONMORTGAGE consumer debt in the U.S. is currently $1.3 trillion. That equals about $4,600 of debt for every man, woman and child in the United States. American consumers, with more credit cards per capita than any other country in the world, are in serious financial trouble. So serious, in fact, that last year more than 1.4 million Americans filed for personal bankruptcy.
Why are debtors having so much trouble making their payments and managing what they owe? Too little income and too much debt, says a recent survey on consumer behavior by Western Union Commercial Services. The survey also found that consumers who are overextended are willing to assume even greater debt to meet their financial needs--a dangerous tactic that could send them into a financial tailspin.
If you're concerned that your unwieldy credit load may eventually put you in the red, read on. It's never too late to turn the tables and start developing the habits that will get your credit to an optimum level and keep it there.
As difficult as that feat may seem, it really can be done. Mamie Walker, once $47,000 in debt with seven credit cards, now owes just $1,900. The 38-year-old mother of three from Wake Forest, North Carolina, says that over the past 15 years, she has budgeted her way to peace of mind and freedom from angry debt collectors.
"I didn't know then what I was spending," remembers Walker, who is employed in the manufacturing department of a local telecommunications company and is studying liberal arts at Duke University in the evenings. "Now, I've developed a budget, and everything that I buy is paid for in cash." Walker signed up for credit counseling and cut up all her credit cards. She's also started a savings account and has reduced entertainment, food and clothing expenses.
Like Walker, evaluating the way you live will be an essential part of your quest for good credit. To put yourself on that track, understand first that credit and money are inseparable. "Good credit starts with solid money management," says Bettye J. Banks, vice president for education at Consumer Credit Counseling Services in Dallas. "The same controls that help you manage your money well will help you manage your credit well," she says. Look seriously at your financial situation, write down your long- and short-term financial goals and make the commitment to monitor your spending.
Develop a budget. "The first three months are the hardest," says Walker, "but it all starts with having a plan and sticking to it." When you create a budget, you'll know exactly where your money is going and what needs to be modified.
Gather your checks and bills back six months, and put them into the categories shown on the budget worksheet (see "Consumer Take Charge--Budget Worksheet") Your regular expenses include your steady monthly commitments, including rent and credit payments. Variable expenses, such as food and entertainment, can change drastically. That's where you should examine your expenses closely.
When all categories are filled in, figure out your total monthly and annual income, then subtract your monthly and yearly expenses. If the number is negative, determine where you need to cut back and continue to keep track of your expenses on a monthly basis.
With this budget in mind, think twice about making new purchases. "If I don't have the money for it in the bank, I leave it at the store," says Walker. She now uses a debit card instead of a credit card so that money is drawn directly out of her checking account.
Besides getting your budget under control and maintaining good credit habits, you should also be aware of the creditors' rating system. Whether you're an experienced credit card holder or a beginner trying to establish a history, here are some key points to understand.
Pay your bills on time and before the due date. "It's not OK just to make a payment," says Banks. "Don't think you're only a month late and then double up on payments the next month," she says. If you don't make payments by the due date, it will be negatively reflected on your credit report. Any payment more than two months late is considered delinquent.
A creditor bases its projections on expected income from customers. "Every small pebble in the pond affects the other pebbles. If your payment is due on January 1 and you don't pay, then the creditor is at risk because it will have to alter its anticipated income," she explains.
Keep in mind that paying no more than the minimum payment every month is a no-win situation. "It would take 11 years for a person to pay off a $2,000 loan at an 18% interest rate if he just paid the minimum," says Luther R. Gatling, president of Budget and Credit Counseling Services in New York.
Read the fine print on your credit agreement. "Understand what the interest rate is and what the penalties are," says Gatling. Compare credit card interest rates both at the start of your agreement and long term. Find out the terms of your grace period, whether interest is charged immediately after a purchase or after a specified period. Also understand how finance charges work. Ask customer services how you will be assessed a charge based on purchases in a billing cycle. Inquire about annual fees, the penalties for exceeding your credit limit, missing a payment or not using your card regularly. It all adds up. If you're concerned that your charges are too high, Get Smart and CardWeb Inc. list low-fee credit cards nationwide on the Internet.
Subscribe to Posts [Atom]
