Credit

This post is all about credit. I know I’ve skimped over it briefly in a few other posts, but this post is the motherload. I think people compensate with what they think they know to cover up the things they don’t really know anything about at all. And credit is no exception to that rule. People sometimes don’t know that there are Advantages to credit along with disadvantages. People jump into credit without taking their own character into consideration and find themselves in a world of problems. The various Acts that were enabled to protect consumers, the different variants of credit, and how you should truly calculate your credit.

Where there is a pro there is a con and understanding the advantages and disadvantages to credit is the first step:
Advantages:
• Able to buy needed items now
• Don’t have to carry cash
• Creates a record of purchases
• More convenient than writing checks
• Consolidates bills into one payment
Disadvantages:
• Interest (higher cost of items)
• May require additional fees
• Financial difficulties may arise if one loses track of how much has been spent
each month
• Increased impulse buying may occur


I borrowed money from a friend recently. And I paid her back within a reasonable time frame. Does that reflect my character when it comes to credit? Well, to a degree. It definitely doesn’t reflect on my ability to pay off my debt entirely within a reasonable time frame, but it might suggest that I would make one hell of an attempt to get it done. In terms of credit, you’re not a robot. You’re unlike anyone else, so you should ask yourself a series of questions before you endeavor to take a new credit card or any other line of credit.
Character—will you repay the debt?
From your credit history, does it look like you possess the honesty and reliability to pay credit debts?
• have you used credit before?
• do you pay your bills on time?
• do you have a good credit report?
• can you provide character references?
• how long have you lived at your present address?
• how long have you been at your present job?
Capital—what if you don’t repay the debt?
Do you have any valuable assets such as real estate, savings, or investments that could be used to repay credit debts if income is unavailable?
• what property do you own that can secure the loan?
• do you have a savings account?
• do you have investments to use as collateral?
Capacity—can you repay the debt?
Have you been working regularly in an occupation that is likely to provide enough income to support your credit use?
• do you have a steady job? What is your salary?
• how many other loan payments do you have?
• what are your current living expenses? What are your current debts?
• how many dependents do you have?


So you have your character cross-examined and you’re still going to go for the line of credit. Here are some very sound guidelines to keep you on the right track:
• borrow only what you can repay.
• read and understand the credit contract.
• pay debts promptly.
• notify creditor if you cannot meet payments.
• report lost or stolen credit cards promptly.
• never give your card number over the phone unless you initiated the call or are certain of the
caller’s identity.

You should also know what your rights are as a consumer. If you feel your rights are being infringed upon, having knowledge of the following acts will help you to take the appropriate action. There are very few decisions you can make in life without the proper information and without properly educating yourself. Credit is definitely not one of those decisions.
Truth in lending act (1968)
Ensures consumers are fully informed about cost and conditions of borrowing.
Fair credit reporting act (1970)
Protects the privacy and accuracy of information in a credit check.
Equal opportunity act (1974)
Prohibits discrimination in giving credit on the basis of sex, race, color, religion, national origin, marital status, age, or receipt of public assistance.
Fair credit billing act (1974)
Sets up a procedure for the quick correction of mistakes that appear on consumer credit accounts.
Fair debt collection practices act (1977)
Prevents abuse by professional debt collectors, and applies to anyone employed to collect debts owed to others; does not apply to banks or other businesses collecting their own accounts.


Also you should educate yourself on the types of credit:
Single-payment credit
Items and services are paid for in a single payment, within a given time period, after the purchase. Interest is usually not charged.
• utility companies, medical services
• some retail businesses
Installment credit
Merchandise and services are paid for in two or more regularly scheduled payments of a set amount. Interest is included.
• some retail businesses, such as car and appliance dealers
Money may also be loaned for a special purpose, with the consumer agreeing to repay the debt in two or more regularly scheduled payments.
• commercial banks
• consumer finance companies
• savings and loans
• credit unions
Revolving credit
Many items can be bought using this plan as long as the total amount does not go over the credit user’s assigned dollar limit. Repayment is made at regular time intervals for any amount at or above the minimum required amount. Interest is charged on the remaining balance.
• retail stores
• financial institutions that issue credit cards

And finally a few general rules of thumb to get you on the right track:
Never borrow more than 20% of your yearly net income
• If you earn $400 a month after taxes, then your net income in one year is:
12 x $400 = $4,800
• Calculate 20% of your annual net income to find your safe debt load.
$4,800 x 20% = $960
• So, you should never have more than $960 of debt outstanding.
• Note: housing debt (i.e., mortgage payments) should not be counted as part of the 20%, but other debt should be included, such as car loans, student loans and credit cards.
Monthly payments shouldn’t exceed 10% of your monthly net income
• If your take-home pay is $400 a month:
$400 x 10% = $40
• Your total monthly debt payments shouldn’t total more than $40 per month.
• Note: housing payments (i.e., mortgage payments) should not be counted as part of the 10%, but other debt should be included, such as car loans, student loans and credit cards.