HerrMobius

Remember the definition of net worth (wealth)?

Assets – Liabilities= Net Worth

Liabilities are your debts. Debt reduces net worth. Plus, the interest you pay on debt, including credit card debt, is money that cannot be saved or invested—it’s just gone. Debt is a tool to be used wisely for such things as buying a house. If not used wisely, debt can easily get out of hand. For example, putting day-to-day expenses—like groceries or utility bills—on a credit card and not paying off the balance monthly can lead to debt overload. Lots of people are mired in debt. In some cases, they could not control the causes of their debt. However, in some instances they could have. Many people get into serious debt because they:

· Experienced financial stresses caused by unemployment, medical bills or divorce.

· Could not control spending, did not plan for the future and did not save money.

· Lacked knowledge of financial and credit matters.

Tips for Controlling Debt

· Develop a budget and stick to it.

· Save money so you’re prepared for unforeseen circumstances. You should have at least three to six months of living expenses stashed in your rainy day savings account, because as the poet Longfellow put it, “Into each life some rain must fall.”

· When faced with a choice of financing a purchase, it may be a better financial decision to choose a less expensive model of the same product and save or invest the difference.

· Pay off credit card balances monthly.

· If you must borrow, learn everything about the loan, including interest rate, fees and penalties for late payments or early repayment.

I owe, I owe, so it’s off to work I go.

SPEAKING OF INTEREST AVOID CREDIT CARD DEBT

When you take out a loan, you repay the principal, which is the amount borrowed, plus interest, the amount charged for lending you the money. The interest on your monthly balance is a good example of compound interest that you pay. The interest is added to your bill, and the next month interest is charged on that amount and on the outstanding balance.

The bottom line on interest is that those who know about interest earn it; those who don’t, pay it. Planners, like Betty, rarely use credit cards. When they do, they pay off their balances every month. When a credit card balance is not paid off monthly, it means paying interest—often 20 percent or more a year—on everything purchased. So think of credit card debt as a high-interest loan.

Do you need to reduce your credit card debt? Here are some suggestions.

· Pay cash.

· Set a monthly limit on charging, and keep a written record so you don’t exceed that amount.

· Limit the number of credit cards you have. Cut up all but one of your cards. Stash that one out of sight, and use it only in emergencies.

· Choose the card with the lowest interest rate and no (or very low) annual fee. But beware of low introductory interest rates offered by mail. These rates often skyrocket after the first few months.

· Don’t apply for credit cards to get a free gift or a discount on a purchase.

· Steer clear of blank checks that financial services companies send you. These checks are cash advances that may carry a higher interest rate than typical charges.

· Pay bills on time to avoid late charges or increased interest rates.

The Tale of Two Spenders and the Big-Screen TV

Betty, the planner, saved up for the “extras.” When she had enough money in her savings account, she bought a big-screen TV for $1,500. She paid cash. Her friend Tim is an impulsive spender. He seeks immediate gratification using his credit cards, not realizing how much extra it costs. Tim bought the same TV for $1,500 but financed it on a store credit card with an annual interest rate of 22 percent. At $50 a month, it took him almost four years to pay off the balance. While Betty paid only $1,500 for her big-screen TV, Tim paid $2,200—the cost of the TV plus interest. Tim not only paid an extra $700, he lost the opportunity to invest the $700 in building his wealth.

BEWARE THE PERILS OF PAYDAY LOANS AND PREDATORY LENDERS KNOW WHAT CREDITORS SAY ABOUT YOU

People can get deep in debt when they take out a loan against their paycheck. They write a postdated check in exchange for money. When they get paid again, they repay the loan, thus the name payday loan. These loans generally come with very high, double-digit interest rates. Borrowers who can’t repay the money are charged additional fees for an extension, which puts them even deeper in debt. Borrowers can continue to pay fees to extend the loan’s due date indefinitely, only to find they are getting deeper in debt because of the steep interest payments and fees.

Predatory lenders often target seniors and low-income people they contact by phone, mail or in person. After her husband died, 73-year-old Pauline got plenty of solicitations from finance companies.

She was struggling to make ends meet on her fixed income. To pay off her bills, she took out a $5,000 home equity loan that carried a high interest rate and excessive fees. Soon she found she was even deeper in debt, so she refinanced the loan once, then again, and again, paying fees each time. Pauline’s children discovered her situation and paid off the loan. The lessons here are:

· Don’t borrow from Peter to pay Paul.

· Never respond to a solicitation that makes borrowing sound easy and cheap.

· Always read the fine print on any loan application.

Seek assistance from family members, local credit counseling services or others to make sure a loan is right for you. Those who have used credit will have a credit report that shows everything about their payment history, including late payments. The information in your credit report is used to create your credit score. A credit score is a number generated by a statistical model that objectively predicts the likelihood that you will repay on time. Banks, insurance companies, potential landlords and other lenders use credit scores. Credit scores range from under 500 to 800 and above and are determined by payment history, the amount of outstanding debt, length of your credit history, recent inquiries on your credit report and the types of credit in use. Factors not considered in a credit score include age, race or ethnicity, income, job, marital status, education, length of time at your current address, and whether you own or rent your home.

What’s on YOUR Credit Report?

Consumers have the right to receive annually a free copy of their credit report from each of the three major credit-reporting companies:

Equifax: 1-800-685-1111; www.equifax.com
Experian: 1-888-397-3742; www.experian.com
Trans Union: 1-800-888-4213; www.transunion.com

The three nationwide consumer credit reporting companies have set up a toll-free telephone number and one central web site for ordering free reports:

1-877-322-8228; www.annualcreditreport.com

KEEP YOUR GOOD NAME

A credit report that includes late payments, delinquencies or defaults will result in a low credit score and could mean not getting a loan or having to pay a much higher interest rate. The higher your score, the less risk you represent to the lender. Review your credit report at least once a year to make sure all information is accurate. If you find an error, the Fair Credit Reporting Act requires credit reporting companies and those reporting information to them to correct the mistake. To start the process of fixing an error:

· Contact the credit reporting company online, by fax or certified letter, identifying the creditor you have a dispute with and the nature of the error.

· Send the credit reporting company verifiable information, such as canceled checks or receipts, supporting your complaint.

· The credit reporting company must investigate your complaint within 30 days and get back to you with its results.

· Contact the creditor if the credit reporting company investigation does not result in correction of the error. When you resolve the dispute, ask the creditor to send the credit reporting company a correction. If the issue remains unresolved, you have the right to explain in a statement that will go on your credit report. For example, if you did not pay a car repair bill because the mechanic didn’t fix the problem, the unpaid bill may show up on your credit report, but so will your explanation.

Every month, go back to your budget and plan carefully to ensure your bills are paid before their due dates. Betty, the planner, makes sure she pays her bills on time. Betty gets paid twice a month. She has her paycheck set up for direct deposit so she doesn’t have to scramble to get to the bank on payday. With her first paycheck each month, she pays her mortgage (which she has set up on auto debit), cable TV and utility bills. Out of the second check, Betty makes her car payment (also on auto debit) and has a monthly deposit automatically made to her savings account. Betty has found that “autopilot” really simplifies budgeting and saving. If you believe you are too deep in debt:

· Discuss your options with your creditors before you miss a payment.

· Seek expert help, such as Consumer Credit Counseling Services, listed in your local telephone directory.

· Avoid “credit repair” companies that charge a fee. Many of these are scams.

SAVE MONEY BY CHOOSING THE RIGHT LOAN SAVE MONEY BY PAYING LOANS OFF EARLY

If you have good credit, you may want to take out a loan to purchase a house or to cover educational expenses—both are investments in the future. But regardless of how the money is spent, a loan is a liability, or debt, and decreases your wealth. So choose loans carefully. Shop and negotiate for the lowest interest rate. The interest you save can be invested to build wealth. Take a look at the chart to the left. In this example, it is obvious that Pixley Bank and Trust would charge the lowest interest over the term of the loan. What’s not obvious is that your credit score may determine which interest rate you are offered. Use an online auto loan calculator to compare rates.

You can save interest expense by increasing your monthly payments or choosing a shorter payment term on your loan. Betty, the planner, knew her new car would cost more than the sticker price because she would have to pay interest on the loan from the bank. After checking her options, she chose a shorter payment term with higher payments. Betty budgeted enough money each month to make the higher payments. By doing this, she will reduce the amount of interest she ultimately pays. The chart on the left shows how shorter terms with higher payments would affect the total amount and interest on Betty’s $15,000 car loan. Avoid the trap of getting “upside down”—owing more on the car than it is worth when you sell or trade it in. Betty’s car will be paid for in three years, and she plans on driving it for at least eight years. Once her car is paid for, she will continue to budget for the car payment but will invest the money to further build her wealth.

TAKE STEPS TO CONTROL YOUR DEBT GUARD YOUR IDENTITY

As you can see, a big part of building wealth is making wise choices about debt. You need to maximize assets and minimize liabilities to maximize net worth. To manage debt, you need to know how much you have and develop strategies to control it. When Bob decided to reduce his $3,000 credit card debt, he analyzed his debt and developed a strategy. He listed the balance, interest rate and monthly interest on each credit card. He checked his credit score and shopped for the best rate on a new credit card. Then he transferred all his balances to that card. He cut up the old credit cards and used the interest he saved to pay toward the principal balance. He used the new card only for emergencies. What is your credit card debt situation? Using the chart to the left, do an analysis of your own.

My strategy for reducing credit card debt includes:

Just as you protect the security of your home with locks for your windows and doors, you should take steps to protect your identity. Secure your financial records, Social Security number and card, account numbers, and all passwords and PINs (personal identification numbers). A periodic check of your credit report can alert you if someone is illegally using credit products in your name. If you suspect unauthorized access, contact the three major credit reporting companies and place a fraud alert on your name and Social Security number.

Some Tips to Protect Your Identity:

• Shred or destroy your bank and credit card statements and all other private records before tossing them in the trash.

• Give out your Social Security number only when absolutely necessary, and never carry both your Social Security card and driver’s license in your wallet.

• Pick up mail promptly from your mailbox, and never leave outgoing mail with paid bills in an unsecured mailbox.

• Don’t give out personal information on the phone, through the mail or on the Internet unless you’re sure you know whom you’re dealing with.