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Personal > Credit and Debt

Credit & Debt

Used wisely, credit is a powerful financial tool; but if used carelessly, it can lead to a heavy debt load. Whether you've accumulated debt or are considering credit options, understanding the essentials of credit and debt management will help you remain on solid financial ground.

Credit Cards

Credit cards offer many advantages. There is the convenience of being able to buy needed items now and the security of not having to carry cash. You also receive fraud protection and in some cases rewards for making purchases.  With these advantages also come responsibilities. You need to manage credit cards wisely by understanding all of the card's terms and conditions; stay on top of payments; and realize the true cost of purchases made with credit. Using a credit card is like taking out a loan. If you don't pay your card balance in full each month, you'll pay interest on that loan.

Choose Wisely
The best way to maximize the benefits of credit cards is to understand your financial lifestyle - your money needs and wants. Once you determine how you'll use a credit card, it's important to understand all of the card's features including:

  • Annual Percentage Rates (APRs) and whether rates are fixed or variable
  • Annual, late and over-limit fees
  • Credit limit on account
  • Grace periods before interest begins accruing
  • Rewards including airline miles or cash back

Stay Alert
Some credit card issuers offer free, personalized and automatic alert messages to your phone and email to help you keep track of:

  • Available credit
  • Balances
  • Payment due dates
  • Payment histories
  • Purchase activity

Understand Your Rights
Credit cardholders are entitled to protections:

  • Zero liability means you are not responsible for fraudulent charges when you report them promptly.
  • In some cases, you have the right to dispute purchases with merchants for unsatisfactory products or services.

Follow the 20-10 Rule
This general "rule of thumb" helps you understand how much credit you can afford. Credit cards are loans, so avoid borrowing more than 20 percent of your annual net income on all of your loans (not including a mortgage). And payments on those loans shouldn't exceed 10 percent of your monthly net income.

Credit History

To get a glimpse of your financial future, many businesses look at your financial past. This history is contained in your credit report. Your credit report determines everything from whether you qualify for a loan and the rate you'll pay on that loan, to renting an apartment and obtaining car insurance.

What Is a Credit History?
Your credit history is a financial profile. It lets lenders, landlords and employers know how you have managed money in the past and helps them decide whether or not to do business with you. This history is contained in a credit report that is kept on file by the three independent credit bureaus listed below. It may include such information as:

  • How promptly you have paid off credit cards and loans
  • How well you have handled paying other bills, such as rent and utilities
  • Your total outstanding debts
  • How much available credit you have on credit cards and home equity loans

 

Who Can See Your Credit Report?
Your credit report can and most likely will be reviewed by anyone planning to give you a loan or credit, such as banks and credit unions, credit card issuers, auto financing companies, and insurance companies. Your report also may be checked by landlords and potential employers. Some lenders may also use the details in your report to determine how much credit they are willing to offer you and at what rate. Anyone with a legitimate business need can access your credit report, though an employer (or prospective employer) typically requires your written consent to do so.

Beware of "Fast Fixes" For Accurate Credit Problems
If you’ve had any late payments, foreclosures, or repossessions, this information stays in your credit report for up to seven years. If you’ve filed for bankruptcy, this information can stay in your report for up to 10 years. Some companies claim they can "fix" such problems for a fee. However, it is legally impossible to alter an accurate credit history. If you find yourself in financial trouble, contact a member agency of the National Foundation for Credit Counseling (NFCC), the nation's largest national nonprofit credit counseling network, by calling 1-800-388-2227 or visiting http://www.nfcc.org/.

Credit Bureau Contact Information
Once a year, it’s a good idea to check your credit report for accuracy, and you can do so for free through the three major credit bureaus. Get your reports at http://www.annualcreditreport.com/ or by contacting the bureaus directly:

Equifax
Report Order: 1.800.685.1111
Fraud Hotline: 1.888.766.0008
http://www.equifax.com/

Experian
Report Order: 1.888.397.3742
Fraud Hotline: 1.888.397.3742
http://www.experian.com/

Trans Union
Report Order: 1.877.322.8228
Fraud Hotline: 1.800.680.7289
http://www.tuc.com/

Debt

If you’re in debt, you’re not alone. Consumer debt in America is extraordinarily high. Sometimes it’s hard to know – or admit – if you have a problem with debt. It can be overwhelming to realize that you’ve gotten in over your head, and to worry that you won’t be able to pay back what you owe. The key to getting out of your situation is to act now. Don’t procrastinate. Taking charge of your finances and creating a plan for tackling your debt will cut down your anxiety and get you on the path toward a better financial future.

First, ask yourself whether debt has become a problem for you. Here are some circumstances that might indicate it has:

  • Next month’s bills arrive before last month’s have been paid
  • Your bills often include late fees
  • You avoid opening bills when they arrive in the mail
  • You procrastinate balancing checkbooks
  • You bounce checks

Write it Out
Do you actually know how much debt you have? Many people don’t. Start by making a list of everything you owe, whether it’s a mortgage, a credit card balance, student loans or even money you borrowed from family or friends. Write down:

  • The lender’s name
  • The amount you owe
  • The term of the loan
  • The interest rate and fees

Then total them up. Looking at the numbers can be worrisome, but this is a positive – and necessary – first step to tackling your debt.

The power of 50
Paying the minimum amount due on your credit cards is one of the fastest ways to fall further into debt, and it can keep you in debt for years or decades.  If you have a credit card with a $3,000 balance at an annual interest rate of 18%, and you pay only the 2% minimum monthly payment of $60 per month, it would take you 8 years to pay off your bill. Not only that, you will have paid $5,780 by the end of the 8 years – almost double the $3,000 you thought you were spending when you made the charges. Paying just $50 above the minimum amount due each month will make an incredible difference in how quickly you can pay down what you owe. If you pay an additional $50 per month toward your $3,000 balance for a total payment of $110 a month, you could pay off the debt in 3 years instead of 8, and save yourself over $1,800 in interest. Imagine what you could do with $100 more per month. But if you can pay an additional $50 per month on that debt, for a total payment of $110 a month, you will pay down more of the $3,000 you originally owed. And that means less money for the creditor to charge interest on. As a result, you would pay off the debt in 3 years and save over $1,800 in interest payments.  Imagine what you could do with $100 more per month.

Be realistic
Now that you have analyzed your debt situation, it’s time to look at your monthly budget and set realistic goals. That trip you had planned for next summer, or the new car you were hoping to buy may not be in the cards right now given your new outlook on reducing your debt.

Don’t get discouraged
Reducing debt is like losing weight. You’re not going to lose 50 pounds in a month – you need realistic goals in reasonable timeframes, and debt works the same way. For most people, it takes years to become debt-free. This doesn’t mean you have to stop enjoying your life. It’s just a reminder to live within your means and be diligent about adjusting any spending habits that have contributed to the situation you are in today. Dedicating yourself to paying off what you owe and becoming debt-free will be worth the wait, with the payoff being a brighter financial future.

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