Credit And Debt Management

Credit And Debt Management

by Cathy Pareto

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Table of Contents

1) Credit And Debt Management: Introduction 2) Credit And Debt Management: Credit Reports And Scores 3) Credit And Debt Management: Building Credit From Scratch 4) Credit And Debt Management: Repairing Credit 5) Credit And Debt Management: Credit Cards 6) Credit And Debt Management: Reducing Debt 7) Credit And Debt Management: Debt Collection And Bankruptcy 8) Credit And Debt Management: Credit Counseling 9) Credit And Debt Management: Credit And Relationships 10) Credit And Debt Management: Conclusion

1) Credit And Debt Management: Introduction

America is addicted to debt. Just call us the credit nation, from the highest levels of government all the way down to Main Street USA. America and Americans are obsessed with credit and rely on debt every day. Even as the nation and its consumers struggle under record debt levels, we continue to rack up more.

Like it or not, we need credit. As we have established during and since the global financial meltdown of 2008, credit keeps the wheels of the global money machine well greased. Concepts, such as buying a home, starting a business, or buying an investment property often could not become realities without some form of credit. In fact, utility companies, banks, landlords and even employers often require credit checks before extending services or employment. Consider the following statistics:

As reported by the Federal Reserve Board (FRB), the size of total U.S. consumer debt grew nearly five times in size from $824 billion in 1990 to nearly $2.2 trillion in 2005.

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 According to Experian, without factoring in mortgages, in 2008 the average American held over $16,635 in debt.

According to ComScore, in 2008 55% of Americans maintained a running balance on their credit card accounts.

According to Visa and MasterCard, in 2006 alone there were 984 million bankissued Visa and MasterCard credit and debit card accounts in the United States.

Mail Monitor, a credit card direct mail tracking service, reports that roughly 4.2 billion credit card offers were made to U.S. households in 2008.

An online poll conducted by reports that the average rate for bank credit cards reached a whopping 19% in March 2007, whereas the average rate in 2003 was 16.5%.

Credit and its associated debts are a part of our reality, and will continue to be for the foreseeable future, and it is up to each individual consumer to not let credit ruin them. Unfortunately for many, it already has. The level of consumer debt has grown exponentially in the U.S., where tens of millions of credit consumers find themselves overwhelmed by their personal debts.

If you find yourself in a credit or debt bind, keep reading. This tutorial will provide an overview of credit and debt management concepts that every consumer should know about so they know how to live with credit.

Learn how avoiding loans can be possible and enjoyable in Can You Live A Debt-Free Life?

2) Credit And Debt Management: Credit Reports And Scores

It's funny how things come to define us as people. Sadly, our credit score is one of those things. A credit score can either be a scarlet letter or one-way pass to easy money; it's probably wise for us to begin our discussion with how the credit-reporting process works. A good credit score can translate to much lower interest rates for mortgages, credit cards and auto loans, resulting in significant savings for you.

Credit Bureaus The term "credit bureau" can be used interchangeably with the term "credit reporting agency". These organizations collect credit information about credit consumers by using public records, creditor data, employers and more to compile each person's credit history. The organizations make this information available to current and prospective creditors, employers, landlords and others who are legally allowed to request it. The three credit reporting agencies are: Equifax, Experian and TransUnion.

Credit Scoring These agencies use the data they've collected about you to formulate a credit score, a value that will later be used to determine your creditworthiness, or perceived risk, to

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creditors. Some of the factors considered in calculating the score include the amount you owe on non-mortgage accounts, such as credit cards, your payment history, number of credit lines open, age of credit file, number of recent credit report inquiries and credit history. (Get a look at the various components of the personal and financial data that go into this dossier in Consumer Credit Report: What's On It.)

The FICO? score is the one most widely used by lenders. All three credit reporting agencies have their own names for the FICO? score: Equifax calls it BEACON?, Experian calls it the Experian/Fair Isaac Risk Model, and TransUnion calls it the FICO? Risk Score. Despite the different names, however, the scoring method is consistent across all three.

Most people's FICO scores vary slightly by agency because some lenders only report credit data to one or two credit bureaus and not to all three. The FICO score has a scale ranging from 300 to 850 (the higher the score, the better), but most people's scores tend to range between 600 and 850. However, other factors, including income and employment history, are also considered when consumers are evaluated for creditworthiness.

Credit Score Components So, what are the main factors of your credit score? The most important determinant is your payment history, which counts for up to 35% of your score. Next is the amounts owed, for 30% of your score, followed by length of credit history, which makes up 15%.

Many different things can negatively affect your credit score, so be sure that you know what they are so you can avoid them:

Late payments Foreclosure Bankruptcy Judgments Repossessions (the act of a lender taking back a valuable asset, such as a car, if

you are unable to repay debt) Too many inquiries (a credit inquiry occurs any time you apply for a new loan or

line of credit (LOC)) Charge-offs

One of the best methods to avoid any of the aforementioned credit challenges begins with a budget. A budget is merely a guideline of how you spend and how you should allocate your resources. It is intended to track your fixed and variable expenses as well as your savings allocations. A budget is an essential tool for any debt-management plan in that it gives you a better understanding of your financial situation. Knowing how and where you spend your money is an essential building block to fiscal responsibility and offers the best defense against unforeseen or unwanted credit disasters, such as

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foreclosure or bankruptcy.

3) Credit And Debt Management: Building Credit From Scratch

Now that we have a fair understanding of how your credit score is determined, let's introduce how credit is established from scratch. You must be of legal age (18) before you can enter into a contract, including a credit card agreement. It is also advisable that any first-time credit consumers request copies of their credit reports from each of the three bureaus even though there may be little information available. Reviewing this information will help you ensure that you have not been a victim of credit bureau reporting errors or identify theft. (To learn more about fixing any errors, see How To Dispute Errors On Your Credit Report.)

Next, if you do not already have one, it is highly recommended that you open a checking or savings account (or both) and use it responsibly. Lenders see individuals that have bank accounts as stable and likely more creditworthy, than individuals that do not.

Consider Getting a Cosigner If you are young and your parents are willing to consider this, have one of your parents cosign for you when applying for your first credit card. But be aware that adding a joint account holder has its risks because either account holder can be held responsible for repaying the entire account balance if the other applicant is unable to pay. (Parents can read more a in Is Your Teen Ready For A Credit Card? and young adults can learn more in Getting A Loan Without Your Parents.)

Cosigning on other types of credit applications creates full liability as well, even though the primary applicant usually intends to fully repay the debt himself. Some examples of this are a parent cosigning a lease for a child's first apartment or a girlfriend cosigning a loan for a boyfriend's car. If the primary borrower stops paying the debt, the bill collectors will track down the cosigner and require her to satisfy the debt. If she doesn't pay, her credit history will deteriorate along with the primary borrower's and legal action may follow against both parties.

Start With a Store Credit Card If getting a cosigner is not an option, consider starting your credit history with a department store or retail chain credit card, which is typically issued by a finance company, not a major lender. These creditors tend to offer easier credit to people, but credit limits for new credit consumers are usually set quite low ($1,000 or less) and the cards have much higher interest rates. If approved for a store card, be sure to limit your cards to just one or two. Don't overdo it, because too many inquiries or open lines of credit (LOC) can have a detrimental effect on your score. (Can't get a credit card without a credit history, and can't get a history without a card? Break the catch-22 in How To Establish A Credit History.)

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Your Last Resort: A Secured Card If all else fails, you can apply for a secured card, which requires you to deposit and hold money in an account backing the card before you make credit card purchases. While this may sound like a redundant process, it actually helps you establish a payment history, which is critical to lenders. Check out or for a list of secured credit providers.

If you opt for this method, screen the card issuer carefully, as the annual or application fees among different providers may vary (this is also true of unsecured credit card providers). Try to find a credit issuer that does not charge an application fee, has a low or no annual fee, allows you to convert your unsecured card to a regular credit card after 12 to 18 months of established payment history, and reports your history to all three credit bureaus. After all, if the issuer doesn't report to the credit bureaus, the card won't help build your credit history.

If you've been denied credit because of your credit report, you are entitled to a free copy of your report from the reporting agency the lender used. The lender must supply the credit bureau's name, address and telephone number, usually by a "denial of credit" letter. You then have 60 days after receiving the denial notice to request your free report.

4) Credit And Debt Management: Repairing Credit

Repairing your credit when mistakes or unfortunate events in your past have negatively impacted your credit score can be a slow and tedious process. Don't believe the hype of fast-credit-repair companies who claim to make your bad credit disappear - they won't. Accurate negative information on your credit report is there for a reason, and stays on your report for seven years, with the exception of chapter 7 bankruptcy, which lasts on your record for 10.

Getting rid of the bad credit in order to improve your credit score requires adding positive information to your credit history. Getting started might seem difficult, but you'll build momentum once you prove that you can handle credit responsibly. Rebuilding your credit means going through the same cycle as a new credit user. But take heed: to build new credit and improve your score, you must retrain yourself and modify your detrimental spending habits.

Some examples of poor spending habits include making purchases based on emotion or compulsion. Spending for the sake of spending, or "retail therapy", can be detrimental to your wealth. Before you spend your money, ask yourself if what you are buying is really necessary, or if it will just end up collecting dust in your closet. If you find that the item is more likely to be wasted than used, think twice about buying it. Learning to live more frugally will go a long way toward establishing a fiscally sound life. (Learn how to

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