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Take Control of Debt

Take Control of Debt

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.

Why People Get into Trouble with Debt

More than 1.4 million individuals filed for bankruptcy in 2001, a significant increase from the 316,000 individuals who filed in 1981. That means 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.

Wealth-Building Tips

  • 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.

Avoid Credit Card Debt

When you do use a credit card, pay off the 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. (Remember your daily expense sheet from Chapter 2? Use it to keep track.)
  • 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.

Know What Creditors Say About You

Those who have used credit will have a credit report that shows everything about their payment history, including late payments. A history of paying bills late can have a negative impact on your credit record. Banks and other lenders use credit reports when deciding whether to loan money. Insurance companies and potential landlords and employers may also check credit reports. A person's history of paying bills is a good predictor of how he or she will pay future debts. Creditors generally look for a two-year history of consistently paying bills on time to establish good credit. A credit report that includes late payments, delinquencies or defaults could mean not getting a loan or having to pay a higher interest rate because the borrower has a greater risk of default.

Review your credit report at least once a year to make sure all information is accurate. (See Intro and Resources section for contact information.) Correct errors on your report by:

Alerting the credit bureau to the error.

  • Sending the credit bureau copies of canceled checks or other payment information.
  • Explaining the problem in a brief letter. The credit-reporting agency must investigate your complaint within 30 days and get back to you with its results.
  • Contacting the creditor if the credit bureau disagrees with you. When you resolve the dispute, ask the creditor to send the credit bureau 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 our explanation.

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.

Take Steps to Control Your Debt

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. To reduce credit card debt and monthly interest, find a card with a lower interest rate and transfer the remaining balance to that account. Cut up the old credit cards.  Use the new card for emergencies.


Used with permission from the website of The Federal Reserve Bank of Dallas.

Copyright 2002. All rights reserved.

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This content was last modified on: 07/22/2008

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