Cost of Credit | Personal Finance
The cost of credit depends on who you borrow from your credit history, how much you borrow and how long you take to repay it. Credit costs will vary from lender to lender. Before you borrow, compare the costs at several places.
At a given interest rate, borrowing a smaller amount of money will result in a lower overall credit cost to you. So, a larger down payment lowers the total amount you will have to pay in finance charges.
The longer you take to repay your debt, the more you will pay. The cost will vary with how long you take to pay. Try to take the shortest repayment period you are able, and make the highest monthly payments you can safely afford.
Your credit history shows your ability and willingness to repay a debt. It is measured by your record of paying bills. It is determined by how prompt and reliable you have been in making past credit payments. A good credit history helps you qualify for future credit and may also help you get credit at a lower cost.
Can I Afford It ?
Let's say you really want a new range, but you don't have the money for it, what do you do? Do you borrow the money? Or, do you wait until you can save some money and buy it later?
Consider these basic guidelines when thinking about borrowing money.
- Use the 20 percent rule. Your total debt load (except for your mortgage payment) should not exceed twenty percent of your yearly after tax income. Caution!!! This maximum may still be too high of a maximum with some families, such as those with an uncertain job future or a low income.
- Use the "Credit Signal Light" worksheet to help you. Write down how much money you bring home monthly. Multiply the amount by 0.20 for the maximum amount of credit you can afford. Compare this to your current monthly payments. Now decide can you really afford to purchase that new range?
- How much credit you use is really a personal decision, but do look at your needs realistically. Credit is just one part of your spending plan. Consider carefully before obligating any of your future income. .
How to handle Debts ?
The best way to handle debts is to avoid them in the first place. But we all know for the majority of families, that is very difficult to do. If you answered "YES" to 2 or more of the statements at the beginning of this article, then it's time for you to act and do something to better manage your debt load.
- Make sure you know who you owe and how much you owe them. List each creditor ( loan company, bank, department store, family members, the total balance owed, the date the monthly payment is due, the number of payments left, the amount of the monthly payment, the due date, and any amount that is past due. Total the balance owed, then add your monthly payments.
- Look for ways you might increase your income or decrease your spending. Try to free up some income so you can make your payments. You might want to re-read lesson three for tips on reducing your spending leaks.
- Do not use any more credit until you are in better financial shape. Try hiding those credit cards so you won't be tempted to use them. You may even need to cut them up! That's just exactly what some budget counselors make their clients do before payments are adjusted.
- If you see you will not be able to make your payments, by all means, contact your creditors. DO NOT IGNORE THEM !! If you don't contact them about your financial difficulties, and don't make scheduled payments, your account may be turned over to an independent collection agency. However, many creditors, if they know the facts about your financial problems and are convinced of your intent to pay--may agree to defer payments or refinance the debt to reduce the size of your monthly payments. Many are willing to make some other kinds of arrangements with you.
- To be helpful, creditors must know of your problems BEFORE your payments are overdue. Avoiding them is the WORST thing you can do. Above all, BE SURE TO KEEP YOUR WORD. If creditors are willing to help you out, be sure you follow through as you say you will.
- Contact a consumer credit counseling service for some help. Your County Extension office can provide you with some budget counseling advice and information, but is not able to mediate your payments with creditors.
Avoid the Credit Card Blues
It is all too easy to make purchases when you just have to pull out the "plastic." Easy that is, until all of the monthly bills arrive. Many families use credit to make ends meet and then find it hard if not impossible, to make all the monthly payments. That's when the "credit card blues" set in. If you have trouble just meeting your monthly payments, let it be a warning to you to cut back on credit use. If you have a hard time avoiding impulse buying, leave the credit cards at home. Keeping track of what you charge is another idea. Those purchases add up at the end of the month without you realizing it.
Finding ways to reduce spending is hard for many families, but not impossible to do. Everyone in the family should be included in the cutbacks. The more involved the family is in planning ways to reduce spending, the more committed they will be to succeed. It is also a good lesson for your children to learn early in life.
Be Credit Wise
Credit can be a friend or a foe. It can be an asset or a liability.
If you abuse the privilege, it can ruin future plans. As your family's money manager, you have the responsibility to use credit wisely. If you find your debts have piled up and you feel as if you are out of control, develop a plan to help you solve the problem. Getting out of debt takes a lot of work and self-discipline. It can't be done overnight, but it can be done!
Save, Buy Later? Rent? Buy on Credit?
John and Mary want to get a color television with a remote control in time for Christmas. What should they do? Should they buy the TV on credit? Go to a "rent-to-own" store? or maybe they should wait until next Christmas and save the money each week and pay cash for a new TV. It is necessary they decide if they have a real "need" for the television, or if they just "want" a new TV.
Many people are attracted by the "rent to own" stores because they can satisfy their wants immediately. If you are thinking about making a major purchase, it is necessary to weigh the pro's and con's of each choice. Included here is a review of the options people would have in making such a purchase decision. Review carefully. Then, when you are faced with this type of buying decision, you will be better prepared for the purchase.
Since rent-to-own stores have become very popular, here are some questions you will want to ask about their contracts BEFORE making a purchase.
- What is the total cost? Multiply payment amount times the number of payments.
- Does the company guarantee the item being rented is new?
- Can the customer buy the item outright at a reduced price at some point during the contract, or do they have to make all of the contracted payments to become the owner.
- Even though the company may provide repairs at no charge, does it also provide a substitute at no extra charge or stop payments during the repair period?
- Does the company require a large "balloon payment"? Can they reinstate the RTO contract without losing the investment up to that point?
- If the renter misses one or more payments can they reinstate the RTO contract without losing the investment up to that point? Are there large penalties charged?
- Does the insurance company require the renter to purchase insurance on the rented item, even though the customer may already have home coverage?