Managing Your Personal Finances

Did you know that Americans paid more than $65 billion in interest last year, or that credit card debt accounts for more than $565 billion? According to the US Department of Health and Human Services, 96% of Americans never achieve financial independence. The Wall Street Journal found that 70% of Americans live from paycheck to paycheck and the average American has 13 credit cards and carries $7,500 of credit card debt.

These statistics are real and frightening. Many people never take the initiative to learn about money management, and as a result they find themselves at the mercy of their bad financial decisions. If you can answer, "Yes" to three or more of the following, you do not have a true understanding of your personal finances.

Because more debt is better for credit card companies, they are willing to loan you money because it is more profitable. Consumers who make only the minimum payments on high-interest debt are a credit card company's ideal customers. For example, $10,000 lent out at an 18.5% interest rate and paid back at the minimum payment of $20 per month would cost $24,500 to pay off over a 32-year period! And with aggressive marketing schemes such as pre-approved credit lines and increased credit limits, many consumers are easily ensnared into more and more debt.

Consumer credit card debt carries with it a deep personal impact. Financial difficulties are considered a social stigma, and because of this many people fail to seek the help they need to manage their finances. Money is also the most commonly reported reason that couples argue over and is a central issue in most divorces. The national impact is just as staggering. National debt is at an all-time high at nearly $1 trillion—that's 1 with 12 zeroes after it! Bankruptcies are also at record numbers, with over 1.3 million declared in 1997 alone. That number is up nearly 63% from just 10 years ago.

Bankruptcy, although it may seem like the easiest way out of a bad situation, is rarely a good solution. In order to declare bankruptcy, you must be unable to repay your creditors and it will only address dischargeable debt. Although this will forgive credit-card debts, you must still pay any taxes owed, alimony or child support, any liabilities from DUI/DWI, most student loans, and criminal fines and penalties. There are two types of bankruptcy a consumer may declare:

Your bankruptcy also becomes a matter of public record. As part of your credit record, it adversely influences your credit score, which is how lenders judge whether or not to extend you credit. The top five factors in determining your credit score are your payment history, any outstanding debt, your credit history, your pursuit of new credit, and what types of credit you have. Your history is a prologue to your future; your payment patterns, especially the most recent ones, are relevant to your ability to repay debt.

As a savvy consumer, you must be aware of your rights under the Fair Credit-reporting Act and the rights extended to the credit card company. Under the FCRA, you can expect the following:

In addition, you have the right to request that collectors not call you at your place of employment, and you have the right to assistance in restructuring your debt.

When you accept a credit offer from a credit card company, you give them certain rights. This includes the right to get paid and the right to charge you certain fees if you pay late or go over your stated credit limit. In addition, you agree to pay what outstanding debt you owe as well as the stated interest rate, which is usually very high. Credit card companies also have the right to report your credit information, such as delinquencies, collection accounts, charge-off accounts, closed accounts, judgments, tax liens, and bankruptcies, to the credit-reporting agencies.

So now that you're aware of your rights as a consumer and have become more knowledgeable about personal finance, what are your options?

You can do nothing. This only serves to make the problem worse, and has the potential to damage your credit history even further. Any solution you use, when you finally decide to address the problem, will be even more difficult to implement.

You can pay off your debts. This can be accomplished by debt consolidation, declaring bankruptcy, or debt restructuring.

Is debt consolidation (refinancing your car or home, etc.) a good idea? Your credit card debt is currently unsecured. Why would you convert it? Under debt consolidation, your options are reduced and your risk is increased, since you can charge again as soon as you pay off your outstanding balances. "Betting the farm" is not always the best option.

If you declare bankruptcy, it will remain on your credit record for 7 to 10 years and will alert potential creditors to the fact that you are on record as not being responsible for paying your bills. In addition, not all of your debts are written off under bankruptcy. Certain debts such as alimony, child support, fines, taxes, etc., must still be repaid.

Debt restructuring is the best alternative. Under this plan, which remains completely confidential, you are encouraged to take on no new debt in order to pay off old debts, and creditors will usually lower or eliminate monthly interest payments altogether. Unlike debt consolidation, you do not have to use your equity as collateral. You will have a convenient, simplified single payment every month, and you can prepay without penalty at any time. In addition, it can improve your credit record by re-aging your past-due accounts.

If you are truly serious about learning how to manage your personal finances, you must accept some realities. First, you did not get into your current circumstances overnight, and it will take time to solve your problems. You can do that by identifying why or how your problems got started. After that, you must formulate a plan to get out of debt.

To start, define your goals. Write down what you want and are willing to work for. Then work towards funding your goals. For example, you might want to reduce your debt by $250 every month. When you make out your budget, be sure to set aside $250 towards that goal. Develop your budget by writing down your income and expenses and keep records of where your money goes. You can track how effective your budget works by analyzing the results.

Taking charge of your personal finances is not always an easy step. We hope this article has been of use to you. If you have any further questions or need help with any of the issues discussed, please feel free to contact us at any time.

 

Appendix

Credit-reporting Agencies

Experian's National Consumer Assistance Center
P.O. Box 2104
Allen, TX 75013-0949
1-888-EXPERIAN (397-3142)

Equifax Information Services
P.O. Box 740241
Atlanta, GA 30374-0241
1-800-378-2732

Trans-Union Corporation
P.O. Box 390
Springfield, PA 19064-0390
1-800-916-8800


Other Agencies

Federal Trade Commission
Consumer Response Center
FCRA
Washington, DC 20580


Useful Web Sites

Bankruptcy attorney Warren E. Agin (www.agin.com)
Legal information (www.legalresource.com)
Credit repair information (www.ecreditrepair.com)
Financial & tax information (www.consultmhi.com)