World of Credit

Using Credit

"What's in your wallet?" Capital One has used that catch phrase in their commercials to try and point out that their credit card is what you should be using. But does it really matter which credit card you have if you aren't wise in your use of it?

Credit as a single word has many definitions in Webster's Dictionary. One of the definitions is "influence or power derived from enjoying the confidence of another or others." When you look at the word credit from a financial point of view, this is most definitely the way it is. Another definition given for the word credit that is relevant to this article is "financial or commercial trustworthiness." When you consider that the topic of this article is a display of financial trustworthiness and "financial" power derived from the confidence that others (in this case creditors/lenders) have in you, you can see the importance of being wise in your financial decision.

A credit card is a tangible object that puts us in a position of receiving trustworthiness and displaying financial power. As you read through this article, you will see how using credit (financial trustworthiness) wisely when using your credit card can help you throughout your life.

Credit as a Tool

Credit is a valuable resource if it is used in a responsible and limited manner. In fact, it can be a very helpful financial tool that will help you when making important financial decisions and investments in your life. Credit can help you to purchase a house or a car. It can help you have revolving funds to help pay for emergency or frivolous expenses. It can also help you establish a financial status that will be a benefit when you really need it to be.

Credit can also be the one thing that causes the most financial grief in your life. If abused, it can tie up income as you are constantly trying to pay off debts while they continue to increase from compounded interest faster than minimum payments are made. Abused credit can also lead to future credit problems that will prevent you from having that house, car, or financial status.

Credit provides a lot of advantages and conveniences. Unfortunately, it has costly pitfalls because of interest rates, finance charges, and annual fees. Unfortunately credit isn't free and if you don't use it wisely it gets to be really expensive.

So where does the problem begin? That will actually depend on the situation. A teenager that hasn't learned much by way of finances may see the money being available without realizing that it has to be paid back. And it doesn't have to be a teenager either. Many adults see credit cards as free money, especially since there is only a minimum payment requirement. It isn't uncommon to see someone with more than five credit cards and over $75,000 in debt racked up on them. Yet they continue to pay minimum payments that altogether may equal $500 thinking that all will be okay. Is it a wonder why we have so many people that file bankruptcy when they can't pay anything off and can't get anymore loans?

It is important to think of credit as a tool that will help you in the long run, not just the short-term. It should make you think more carefully before you make purchases.

Making Smart Decisions

When you are in a store and you have an urge to purchase something on credit that you have found, ask yourself if it is something that you really need right now. If the answer is "no" then you may be better off waiting until you have the cash to buy it. Ah, but it is on sale and you don't want to miss out on the price reduction, right? The next question you ask yourself is whether or not you will be able to pay it off sooner than later. If you don't pay it off until later, the money you saved on the price tag will be spent on finance charges. Will you really save yourself some money?

Robin Holland, senior vice president for customer service operations at Equifax in Atlanta says, "If you don't have the money to pay for an item now, you probably won't have it after the credit-card bill arrives. We need to be wise about the use of credit. If you can't pay for an item in a reasonable amount of time, you shouldn't be charging it."

Smart decision making isn't reserved just to being wise with your spending. It also relates to managing your credit accounts. In fact, one of the smartest decisions you can make about credit accounts happens long before you get any. It is the decision to limit yourself.

What? Credit cards and other loans already have limits, so what is the big deal about limiting yourself? The answer to this is simple; if a credit card limits you to say, $1000, and you need (or so you think) more than that, you can get a second or even a third credit card to give you a spending limit that you desire. This isn't a smart decision. It is a decision that could have a negative affect on your credit history. It is also a decision that could get you in trouble if you use those cards so much that you can't pay them off.

If you want to make smart, self-limiting decisions, do the following:

• Limit yourself to one major card with a credit limit you can handle. The credit limit will be different for each person so make sure you are deciding for your needs and not what you see someone else getting.
• Keep monthly charges low. Some people recommend that you should keep the spending to no more than 30-50% of the credit limit. Others may recommend limiting yourself to 15% of the credit limit. Only you can decide for yourself what you should limit on spending.
• Pay in full the amount due each month. This will save you money (no interest or financing charges) and will also give you the full credit amount available should there be an emergency expense that needs it.
• Regularly review your account balance where possible. If you can do this over the internet or phone, it will allow you the opportunity to know what your current balance is at the moment of inquiry.
• Regularly review your credit report. Although this may not directly influence your use of credit, it will let you know what your spending habits are doing to your credit score. This in turn may help you be more self-limiting in your use of credit.

The last smart decision to be mentioned here is your need to design realistic spending and savings plans so that credit can work with you to accomplish them. Having spending and savings plans hopefully will help you to be wiser in your spending habits.

Acquiring Loans

Smart decisions shouldn't be saved just for the spending and payoff side of the responsibility. As you look for loans or credit cards, make sure that you are making smart decisions throughout the process. You need to remember that as much as you want the loan, the bank wants your money. They should be willing to work with your needs and abilities to pay back the loan. At the same time, you shouldn't be so stubborn to think that they have to cater to your most ridiculous requests. Those companies sending credit card applications in the mail still need to make money and will send you on your way without a dime if you don't act wisely.

No matter what type of loan you want, but most importantly with credit cards, do a little bit of reading first. You don't have to do research on the Internet, but you do need to read the terms and conditions that are always listed with the applications. You know this section. It is the one with the long paragraphs written with a small font and lots of legal language. They may be trying to save trees by printing it so small, or they may be trying to get you to skip over it instead of reading about the penalties, but regardless of the reason for the small print it is important. Do not pass over it. You may regret it later when you are trying to pay off the loan early and there is an additional fee because of it.

Terms and conditions will tell you what you will be required monthly for payment. It will also tell you the many different ways that you can default on your loan. It will disclose what the APR (annual percentage rate) on the loan is, what the current interest rate is, what the interest rate will become if you miss or are late on a payment, and what other fees you will be charged. It will even disclose to some extent the legal action that will be taken against you.

There is another piece of important information found in the terms and conditions portion that could save a lot of headaches if you make sure to read it. As already mentioned, the interest rate for the card will be disclosed in that section. It will also be disclosed in larger letters throughout the promotional propaganda that comes with the application. You will see that you are getting a low 4.9% interest rate. Then there will be an asterisk (*) next to the advertisement referring you to the small print. When you see this, read the small print and/or the terms and conditions.

More often than not, the asterisk means that the interest rate they are advertising is just an introductory rate. Usually after somewhere between six and twelve months that introductory rate will end and another rate will kick in. The new rate could be a fixed number, such as a common 18.9%. It could also be documented as "prime plus 8%". Prime is not a fixed number. It varies based on the economy and what is happening on Wall Street. It could be as low as 6% (maybe even lower), which means your new interest rate in this scenario would be 14%. Prime could also be as high as 12% (or higher) which means your new interest rate would be 20%. Is this confusing? Don't let it be, otherwise you will be sucked into the pitfall of naivete regarding credit cards.

Payoffs

No matter what form of credit you are considering you should never borrow unless you can realistically meet the pay-back requirement. For fixed loans, such as mortgages, auto loans, and student loans, the payoff date is fixed based on a payment calculation. Fluid loans, such as credit cards and department store cards, don't have a set pay-off date. They require a minimum amount each month but that is all. In fact, those that finance these types of loans prefer that you don't pay off the balance. They want you to finance it over a few months so that they can make extra money. If you are making smart decisions, you won't purchase more than you can pay back, and you will pay off those purchases as soon as you can.

A common consumer rule-of-thumb is to limit non-mortgage credit payments to no more than 20% of your take-home pay. Obviously you need to have enough money to cover all other expenses you have during the month. However, if you take care of all of your financial obligations and have more than the 20% available to pay off credit debt, by all means do it. The sooner you can pay if off the better but don't let your other debts suffer because of it. By the way, if you are able to cover your financial responsibilities and still have more than 20% of your take home pay available, why use credit cards in the first place?

For fixed debts, such as mortgages, you will have a pre-determined amount that has to be paid on a regular (usually monthly) basis. If you make your payments regularly, you will have it paid off on a specific date as calculated by the amount borrowed, the time frame for repayment, and the interest accrued on the loan. If you are able to make additional payments on this debt, make sure that you indicate that the extra payment should be applied directly to the principal and not interest. This will help to shorten the payment period.

If you were to look at payments schedules for someone that wants to get out of debt, you will see recommendations to pay off the smallest balance first. Once that debt is paid off, the recommendation is to then apply the amount of money from that payment to the payment of the next smallest debt. And it continues on like that. It gets debts paid off sooner. This is a good philosophy to follow for both fluid credit debt and fixed debt (mortgages, auto loans, student loans, etc.).

But let's assume that you weren't smart and you purchased more than you can pay off. What is the wisest decision you can make at this point? Let the creditor know that you are having difficulties that prevent you from making payments on the bill. You won't be able to get out of it altogether without filing bankruptcy. But if you are wise enough to call the creditor and explain your situation, they may be willing to work with you.

As you explain the situation, suggest an alternative payment method. You need to remember, they still need to be paid and if they can work out another payment schedule with you that allows you to pay off the debt, they will likely work with you. Be realistic in your proposal. Chances are they will accept it. However, if you run into problems again, you may be out of luck. Then you risk repossession, eviction, garnished wages, or collection agencies coming after you. It can get costly and unpleasant. More importantly, it has a negative effect on your credit. You will lose that financial power and trustworthiness that you are trying to establish. You will end up having little or no credit again. To make matters worse, it could take you another seven to ten years to re-establish your credit and get it in good standing.

If you want to have financial power and trustworthiness that is manifested through a good credit score and long, positive credit history, you need to be wise in your financial decisions. Start being wise in those decisions as early in your life as you can so that you can quickly gain the credit status that will get you through life and all the financial challenges and needs that pass your way.

Your Credit Score

What is your credit score? Don't know? You should. If you aren't aware of what your credit score is, how do you know how creditworthy you are? You may think you have an idea, but you really don't unless you understand what a credit score is and how it is calculated. This article will explain what a credit score is, what it does for you, and how you can find out what it is.

What is a FICO Credit Score?

A credit score is a three digit number that implies how creditworthy you are and how likely it is that you will repay any loan that you receive. The number is based on a statistical analysis of a person's credit files. If you have read the articles "Obtaining Credit" and "Using Credit Wisely", you will have already learned a lot about credit and how your credit standing is effected by how well you manage your finances, specifically the use and repayment of credit cards, the acquiring and repayment of loans, and the wise (or unwise) decisions you make in handling the responsibility of loans and credit cards.

In most cases, when people talk about credit scores, they are referring to FICO credit scores. What is FICO? It is actually an acronym for Fair Isaac Corporation, the company that developed the system to calculate credit scores. Unfortunately, when you reference a FICO score, you could actually be referencing three different scores. That is because the three credit bureaus (Experian, Equifax, and TransUnion) that lenders use to get your credit score and credit report use the FICO calculation a little differently.

Why would the credit bureaus use the calculation differently? Well, to keep the answer to that question simple, it is because each bureau values certain information differently. For example, there may be a bit of information that Equifax and Experian use to calculate your score that TransUnion doesn't use. If everything else in the calculation except that one piece of information was the same, your TransUnion score could (or could not) be higher than the other two.

It is also important to know that each credit bureau refers to the score by a different name. It is good to know what those scores are so that you can identify which credit bureau score you are looking at. Experian calls theirs the Experian/Fair Isaac Score. Equifax calls theirs the Beacon Score. TransUnion calls theirs the Empirica Score.

One thing that remains constant between all three bureaus is the scoring range. FICO credit scores range from a low of 300 to a high or 850. Because they rate credit information differently, you will most likely have three different scores within this range. For example, Experian could give you a score of 792, Equifax could give you a score of 796, and TransUnion could give you a score of 827. Like was said before, since each bureau use information differently to calculate the score, this could be a common situation.

So when you have three different scores, which one gets used? Well that will depend on the lender. Generally mortgage lenders will use the middle of the three scores. Some financial institutions may decide that they want to use only the TransUnion score. Because of this, you don't want to worry about one particular score. What you do want to do is make sure that your credit is good enough to have all three scores be within the same range on the score chart.

The score chart will break down scores into ranges that indicate credit risk. Generally any score above 730 is considered excellent. However, the closer you get to 850, the better your interest rates will be. A score of 700-729 is considered good. Scores of 670-699 need a closer review. Scores of 585-669 are a higher risk. Scores below 585 will cause you to have a limited credit history. If your score is lower than 585, you will have a hard time getting loans, credit cards, or good interest rates when you do get those.

For consumers with poor credit that are working to improve it, there are the Alternative scores. The Alternative scores are based on your bill paying history, outstanding loan balance, types of credit accounts, etc.

What is a Vantage Credit Score?

The Vantage Credit Score is another score that could be used by lenders that are trying to help borrowers qualify for loans. It accomplishes this goal because the score rating scale is higher and the data used to calculate the score is more consistent between the three credit bureaus.

Developed in 2006 with the intent of scoring consumers more consistently, it has been advertised by the three credit bureaus as something that will help banks and lenders further drill down into the "subprime" categories. Subprime lenders are those banks and financial institutions dedicated to borrowers with less than perfect credit or harder to substantiate credit. This means that a borrower with a FICO score lower than 585, who probably wouldn't get a mortgage loan, may get one from a subprime lender using the Vantage score of 800.

Why is there such a difference in the scores? First of all because the formula used by all three bureaus is the same. This means that the same information used for a FICO score can be used, but because the weighted value of that information is different with the Vantage score, credit history can look more acceptable to a lender.

To better explain, if you have bad credit but are working to improve it, a Vantage score will reflect the effort better than a FICO score. That is because the factor that weighs heaviest on the Vantage score is your payment history. Almost 1/3 of the Vantage score is based on this. But FICO looks at this too (35% of the FICO score is based on this), so if you have been diligent on paying off your debts on time, never missing or being late with a payment, your score with Vantage still may not be better than FICO. But, Vantage also looks at your debt to balance ratio, something that FICO doesn't look at. The less you owe of what is available to you, the better the score will be. The other big difference is that FICO weighs heavily (30% of the score) on the amount of debt you owe. Vantage only factors this as 15% of the score which could make a huge difference.

The Vantage score range is from 501 to 990. It is broken down at each like grades in school. 900-990 is an A, 800-899 is a B, 700-799 is a C, 600-699 is a D, and 501-599 is an F. But because of the formulas being different, a Vantage score of 900 isn't necessarily better than a FICO score of 700. For this reason, you need to know what all your scores are and which score the lender is using to consider you for a loan.

What a Credit Score Does for You

When you walk into a bank and ask for a loan, you may think that putting on the best appearance possible will help. After all, the more professional looking you are, the more you will appear to be a successful, trusting person that manages money well and meets their obligations. Guess what, you could go in cutoff jeans and a tank-top with sandals and bed-messy hair. It doesn't matter. The person in the custom tailored Ralph Lauren suit could have a FICO score of 620 while the person in the cut-offs and tank-top could have a FICO score of 820. Guess who is most likely to get the loan?

That is the harsh reality of your credit score. It will govern your ability to get financing when you need it. Even someone in a position of power (possibly the city mayor) or someone who is popular in the public eye (a movie star, for example) can't rely on their social standing to help them. Your credit history speaks volumes about the financial trustworthiness that you hold. If you have been delinquent in the past, you will have a harder time convincing the lender that you will pay them back on time.

Another harsh reality is that the effect of a credit score goes beyond the ability to get a loan. Did you know you may not be able to get a job because of a low credit score? Some positions of employment will heavily depend on a person's credit score if there is a level of financial responsibility associated with the job duties. Would you hire someone to be an accountant for your company when they can't properly manage their personal finances?

Then there is housing, utilities, and even insurance. Did you know that these can be affected by your credit score? Obviously you won't be able to get a mortgage loan with bad credit, but you may not be able to rent a house or apartment either. More often these days a person's credit is portraying them as a risk when it comes to any financial transaction.

Landlords, insurance agencies, and utility companies may not want you as a customer if your credit history shows information that is not desirable such as periods of unemployment or multiple instances of late and/or missed payments. They may require deposits, additional months payments (first and last), or some other amount as a security to draw upon should you become delinquent in your payments or default altogether. Insurance companies may charge you a higher premium for insurance thinking that your life in general is more risky and that your credit score is just one example to show that it is.

So now you know what a credit score does for you, right? Actually, it does a lot more than what has been mentioned. Think of it. All of these things are negative results from having poor credit scores and negative credit history. For all of these negative results, there are positive ones as well. To get those positive results you just have to improve your credit history and score. The better the credit score, the more credit you will have made available to you. It will be easier to get loans and the interest rates will be better. It will be easier to purchase a house or car (just wait and see how well the dealership treats you when they find out you have a score of 800 or more...). You see, not only is it better to have a high credit score it is in your best interest to work on getting and maintaining one.

How Can I Get My Credit Score?

Does all of this information make you want to quickly get your credit history report and find out what your credit score is? It should. What if there is a blemish that needs to be taken care of? You won't be able to take care of it unless you know it exists. So go get it. What, you don't know how? Keep reading.

The three credit bureau companies are "for profit" companies. They don't just give away credit information. However, because of the Fair Credit Reporting Act, you are able to get a free copy of your credit report once every twelve months from each credit bureau. To get the report you can contact each credit bureau separately on their websites or via telephone. However, you also have the option to go to www.annualcreditreport.com and request a copy of the report from all three at one time. You can also use the toll free number for that website (877-322-8228).

When you get your credit reports from each bureau, you will see that there is a lot of information that is the same, yet there is also some information that is different. This will allow you to visualize why scores would be different from each bureau. Unfortunately you won't see the scores.

Credit scores are not given out free with the credit report. You have to pay a fee to get the scores. You will find websites that offer a free credit report and free credit score, but the score will only be free the first time. Unfortunately, you could pay for your score and then end up doing something the next day that will change the score.

Should this and the fact that you have to pay for the score detract you from getting it? It shouldn't. You don't need to continue to request the score each month to see what changes are taking place. Not only is it not necessary, it isn't recommended. Your score won't change very much or very often unless you are being reckless with your credit and your debt responsibilities. If you are being responsible in paying your debts and using your credit, your score most likely won't change much if it does.

The most important thing that you can do is get your credit report, review it for errors or possible fraud cases, and be responsible with the credit that you do have. If there are no errors or cases of fraud, and if you are being financially responsible, your annual review of the credit report will give you an idea of what has happened to your credit score. If you notice something that is wrong or concerning on your report, contact the credit bureaus to get it corrected. Your financial security is your responsibility. Be proactive in making it beneficial to you.

Types of Loans

  Loans. Debts. One leads to the other, yet you want to get one without the other. Sorry Charlie, you are out of luck. But since you need the first, you better know what types of loans are out there and get the right one so that you don't end up with more of the latter than necessary.

Generally, as a borrower you will go to some sort of financial institution, be it a bank, credit union, payday loan business, etc., and request a loan for a certain amount. They will ask you what you are going to use the money for. The loan should be tailored to fit the need. It will also be tailored to fit your credit worthiness. As a result, the amount of money you get may be different than what you were hoping for. The interest rate you pay back may also be different than what you were hoping for.

But you really need the loan so you are willing to take what you can get. Congratulations, you just borrowed yourself some debt. And with that debt, you probably signed away some permission stating that the lending institution can claim the rights to your most prized possessions. Sound unlikely? Well, think again. With certain loans it is very likely. And because of that, your interest in continuing on with this article should have jumped a few levels. Well, happy reading. When you get done, you will be able to apply for the correct loan for your needs and know what to expect in return.

Secured vs. Unsecured

There are many types of loans that you can get. We will focus on personal loans, also called consumer loans. But to understand them all, you need to understand the two categories that they fall under: secured loans and unsecured loans.

Secured Loans

A secured loan is a loan that is given to the borrower with a contract of repayment and the pledge of an asset as collateral. What does this mean? Well, let's look at the most common type of secured loans as an example: a mortgage loan.

Mortgage loans are perfect examples of a secure loan. A mortgage loan is generally for a lot of money. The payback terms usually cover many years. And the house you are buying with that mortgage loan is what the bank uses for collateral. Collateral is a guarantee. You generally won't have the money to guarantee the repayment of the mortgage loan (that is why you got the loan in the first place). So the house becomes collateral. This means that the bank in essence owns the house while you are paying back the mortgage loan. If you stop paying, the bank takes possession of the house and you have to move out. The bank secures their loan with a valuable asset that is yours.

Home Equity loans are loans given to you based on the value of your house. If your house is valued at more than what you owe, you have equity. But this type of loan is another secured loan, so guess what the collateral on a home equity loan is...yep, your house. So if you already have a mortgage loan, and you get a home equity loan, you now have two debts using your house as collateral. You better not default on either one or you will be in a world of financial hurt.

Auto loans are another common type of secured loan. Auto loans aren't generally for as much money as a mortgage so you won't have to pay back as much either. However, you will still need collateral and generally the car you purchase becomes the collateral for the auto loan. You default on it, your car is repossessed (quite an embarrassment in the neighborhood to have that repossessed).

The other commonly used secure loan is referred to as Home Improvement Loan. This is sometimes referred to as a Home Equity Loan, but the financial institution you work with may actually refer to the two differently. The difference between the two types of loans is that Home Improvement Loans aren't granted based on the equity you have in the house. In fact, where equity loans are limited by the amount of equity you may have acquired, improvement loans allow you to borrow up to the total value of your house. The thing that the improvement loan has in common with the equity loan is the collateral. Once again your house if up for grabs by the bank if you default on this type of loan.

Unsecured Loans

Now that you know what a secured loan is, it should be easy to figure out what an unsecured loan is. However, just to make it completely clear, an unsecured loan does not have any of your assets tied to it as a guarantee to pay back.

So what becomes the motivation to pay it back? First of all, there are usually higher interest rates attached to unsecured loans. If you don't pay them back, you will end up owing a lot more than you borrowed because of interest charges. But if that isn't enough of an incentive, how about having collection agencies come after you? I know...you can ignore them by not answering your phone or door. If that isn't enough of an incentive there is always legal action...they could put a lien on assets you have or try to get your wages garnished. And if you are in Queens, New York, you might meet a guy named Guido who would like to show you a pair of brass knuckles and cement shoes as encouragement to repay the loan. Okay, so that last line is a joke but it is important to repay your loans because of the other reasons listed.

So what types of loans qualify as unsecured loans? The most common unsecured loan is a credit card. There are also personal loans, bank overdrafts (loans backed by checking accounts), lines of credit, and corporate bonds. Some of these are revolving loans (such as credit cards), meaning that you will have a limit of what you can spend, but that limit remains as you pay down the balance. So if you have a $5,000 limit, and you spend it all, once you start paying the balance down you have money made available again to you. Take the limit, subtract what you owe, and that is what you have available. And it continues to be that way.

Other types of loans are fixed. With these loans you get a sum of money, spend it how you may, pay it back, and you are done with the transaction. Simple, right? Of course there will be payment terms that say how many months you will be paying back the loan and how much you will pay each month. You will also be told how much money you will be paying in interest to receive the loan. But it isn't a bad thing. In fact, the interest charges may just be enough of a motivation to get your loan paid off.

Education loans fall under the unsecured, fixed loan category. However, they are a little bit different. First of all, they are underwritten by the government. You may go to a bank to request the student loan, but the government is in essence providing the funds. Because of this, they will allow you leniency on paying it back. The leniency comes in the form of deferral of payment until you have been out of school for six months.

The government understands that student loans are taken because someone wants to learn a new trade/career and doesn't have the money to pay for school themselves. The government realizes that if you have to borrow the money to go to school, you probably won't have the money to pay back the loan while you are still a student. Because of this, you won't have to start paying back until you are done. And the interest rate is going to be favorable too.

Debt consolidation loans are also termed as unsecured loans. These can be great because you will only have one creditor to work with and hopefully you will be consolidating to a lower interest rate. But there are some cautions as outlined in the "Managing Debt" article. The benefits are great, but beware of the risks.

There are other unsecured loans that are becoming more and more popular: payday loans. These are also referred to as high risk personal loans, bad credit personal loans, or guaranteed personal loans. Why are they known under these names? First of all, someone that needs to get a quick loan to help them get by until payday is probably not managing their money wisely enough to get by...or at least wisely enough to qualify for a personal loan from a bank. If they are in this situation, they probably don't have the greatest credit score either.

Payday loans usually aren't granted by banks and credit unions. Instead you go to a business that is set up specifically for that type of loan. Because of the nature of these businesses the loans they give out are considered high risk. Think about it, someone with poor credit, can't manage their money enough to get from paycheck to paycheck, and no collateral to back the loan. So why do these companies exist? Unfortunately there is a demand for it. People need to get money to pay for expenses. Payday loan businesses have found a way to make money by lending it to these individuals. How does it work?

First of all, you need to remember that the loans are generally for quick needs to get by until the next payday. Hopefully that is only a few days away. But regardless of the time frame, these types of loans are usually small. It could be anywhere from $50 to as much as $2,000. The lender won't do a credit check on you, but they will verify that you are employed and have a checking account. They verify these two things because if you don't have a job, you probably won't pay back the loan and if you don't have a checking account, they won't be able to secure payment. You see, many of these types of lenders don't actually have all the cash on hand but instead will do a direct deposit of the loan to your checking account. It also means that they can do an automatic withdrawal of the funds you borrowed once your payday has arrived.

One caution about using the payday loan businesses...they can be expensive. Interest rates and fees could put you behind financially when the next payday comes and they withdraw the money that you owe. If this puts you behind, you may need to visit them again before the next payday. Then the cycle continues. Before you know it, you could be finding yourself in a pretty big financial predicament. It is recommended to only use payday loan businesses as a last resort. They are convenient, but convenience could come with a price.

Take Your Pick

Now that you have learned about the different types of loans that are available to you, you can make your selection and choose the one that works best for you. There are other types of loans available that are not covered in this article. They are less common loans and not always available at the institution where you do your banking. For this reason it is important to take what you have learned here and add to that knowledge by researching the financial institutions in your area to see what loans are available for you to choose from.

As you look at your choices, make sure to evaluate your financial situation. Don't go for a loan that will cause financial stress. Don't ask for more than you need. Don't be na�ve. These education articles are here for a reason: to help you be a more financially responsible consumer. As you learn what will help you in making decisions, it is in your best interest to make sure that you are putting to use the knowledge that you gain from these articles and any other research that you do. And now that you know what loans are available, you just need to learn how to get one. And that is taught in the "Getting a Loan" article. Happy reading!

Getting a Loan

  Sometimes in life we are all hit with some sort of a financial setback. Sometimes it happens more than once. Sometimes it is such a hard hit that the only place to turn to acquire the financial resources to recover is the bank. And no, I am not suggesting armed robbery. I am suggesting a loan.

Maybe you aren't hit with a setback but instead would like to start a new business and you need a loan to get it going. Maybe you need to purchase a car, or want to purchase a house. These aren't setbacks, but chances are good that you don't have the finances to just go out and start the business or buy the house. You need a loan to provide the funds to do it.

You know what kinds of loans are available, and you already know which type of loan you need. Do you know what you need to do to secure that loan? This article will help you to prepare to receive the loan that you need and make sure that you are not getting yourself caught in a bad situation.

What to Consider Before Applying

There are a few things that should be considered before applying for a loan. Knowing what types of loans are available will help with a lot of these considerations. The fact that you are getting a loan for a specific purpose will considerably help in the process.

First and foremost, you will need to consider whether you will get a secured loan or unsecured loan. If you are looking at a mortgage, auto, or small business loan you don't even have to worry about that choice. You will have to get a secured loan for any of the three. But a loan for just about any other reason could offer you a choice. Remember, a secured loan means that you have agreed to guarantee the loan with one of your assets. For a mortgage, the loan is secured by the house. For an auto, the loan is secured by the car. With unsecured loans you don't have to worry about this.

Next, you need to consider the loan options themselves. They will all have different terms, interest rates, conditions, payback periods, and maybe even borrowing limits. Many will be very attractive, while others are less so. But you need to consider the less attractive loans as well because they might be the best option when you look at all the terms and conditions.

Sometimes you won't be given the option to consider the differences between the loans. If your credit history isn't up to par, or above it for that matter, some of the options may be taken away from consideration. Any time you apply for a loan, your credit history is going to be checked. Certain loans are only available based on specific criteria within the credit history. Be prepared to have options taken away because of your credit history and score.

Another item for consideration is the monthly interest rate. Don't automatically jump on the lowest advertised interest rate. It may cost you more in the long run. Attractively low interest rates detract attention from the true picture of what you will be paying back to the bank. You see, for every good interest rate there is an overhead cost. In fact, there are multiple overhead costs. For example, you may have an originating fee, a processing fee, an underwriting fee, a credit report fee, and maybe even a customer service fee. Add up these fees and that really low interest rate may become a moot point. Some loans with higher monthly interest rates may not have all of those fees applied which in turn makes them the more economical choice.

You didn't realize how much information, consideration, and work goes into getting a loan, did you? Guess what? We are still in the "What to Consider Before Applying" section. There is still more work to be done. But before we move on, let's finish talking about all that there is to consider.

The next consideration is the time period for paying back the loan. Some loans may have a limited choice on paying back what is borrowed. You may be given a choice of 12, 24, 36, or maybe even as many as 72 months to pay back a loan. On home equity loans you may even see a 15 year payback schedule. Why do you have to consider the payback schedule? Simply put, the longer you take to pay off the loan, the smaller the monthly payments will be. Unfortunately, you could possibly be paying more money in interest over the life of the loan just to have the luxury of a smaller monthly payment. Take a mortgage loan as an example. A 15 year term will have a larger monthly payment than a 30 year term. But at the end of both mortgage terms, the 30 year loan will have cost you a few thousand dollars more.

I know what you are thinking at this point: not a big deal because I will get the 30 year loan and make extra payments occasionally (possibly using your yearly income tax return) and cut some time off the term of the loan and save me some money. Am I right? Well, with some loans that would be a great plan. In fact, it is a great plan for any loan, if you are really intent on doing it and disciplined enough to follow through. But before you sign on the contracts dotted line, ask if there is a penalty for early payoff.

Many lenders want to get the money that they calculate to earn by giving you the loan. If you try to pay off your loan early, that means that the lender will not earn as much money off of the calculated interest that you are saving yourself from paying. There are policies that the lender will have attached to each loan, based on the type and/or size, which you need to be aware of. By getting all of the information first, you could be saving yourself a lot of money. It will take some time to research all the information about the loans, but remember what a lot of people say: time is money. In this case, spending more time could save you money.

As you consider all of these things that have been mentioned, realize that it all changes from one lending institution to another. You really need to look at all of your options from the types of loans, the costs of the loans, and the lenders that offer those loans.

What to Expect When Applying for the Loan

After you have decided on what lender you will use, and to some extent the type of loan you want to secure, you are prepared to get the loan. When you go to that institution and start the process, there are some things that you need to expect to happen so that you aren't caught off guard.

At some institutions, and for certain types of loans, you may need to schedule an appointment ahead of time. Call the lender ahead of time to find out so that you don't waste your time showing up and being told you have to make an appointment for the next business day. If you are able to apply over the phone, internet, or by mail, you obviously won't need to make an appointment but be prepared to get a phone call from the lender with a few questions.

As you fill out the application for the loan, you will have to provide certain information. Be aware that there are no exceptions to the lenders rules and no matter how much you don't want to give out some of your personal information, you will have to. For example, many people are very cautious to give out their Social Security Number (SSN). However, without your SSN the lender cannot request your credit report and score. Without a credit report and score they cannot approve a loan.

Other people don't like to tell what their salary is. Be prepared to do this for certain types of loans. For example, since a mortgage loan is for a large amount of money, the lender will want to make sure that you can pay it off. Not only will he want to know that you are employed, he will probably contact the employer to verify that you do indeed work there and that you make the salary you claimed on your application. It may seem like an intrusion on your personal life, but if you want the loan, it is part of the price you pay.

Something else to expect when applying for the loan is to reserve a lot of time to go through the process. If you are meeting in person with a loan officer it may go faster than if you apply over the phone, internet, or by mail. Applications done by mail generally take the longest. Applications done over the phone and internet won't take as long but may still take a day or two. Applications done in person are usually a lot faster. You might be able to walk into the lenders office and have the loan in your pocket within one hour. But don't expect it to go that fast. Some loans, even when applied for in person, may take a day or two to fund. In fact, if it is a mortgage loan, don't be surprised to see it take anywhere from two to six weeks to fund. Time frames change based on the method of application, the amount applied for, and the type of loan requested.

A delayed response doesn't indicate that the application isn't going smoothly. It doesn't indicate that you are going to be turned down for the loan. What it generally means is that the lender is doing their research to make sure that you are not too high of a risk for the type and amount of loan that you are asking for. Just as you were counseled earlier in this article to research your options, the lender will research theirs. It is all part of the process and is something that you should expect.

What to Take With You

When you apply for a loan, there is certain personal information that you will need. If you are applying in person, make sure to take the items listed below with you. If you are applying over the phone, internet, or by mail, you will still most likely have to provide the information, but may also have to send photocopies of documents later on before the loan is funded. When you apply in person, the lender will take down this information and even make photocopies of certain documents to have on hand for processing the loan. Items to take with you when applying for a loan are:

• Driver's license or other form of official photo identification. The lender will want to see something official with your picture to verify that you really are who you say you are. A driver's license is the most preferred. This is one piece of documentation that the lenders will photocopy for their records.
• Social Security card. Again, they will want proof that you are who you say you are and your SSN helps with that. Identity fraud happens because of people using the personal information of someone else to acquire something of value. A SSN is the most dangerous of personal information to be used in identity fraud so having your card there to show that you are giving them your real SSN will actually help you. This is another piece of documentation that the lenders will likely photocopy for their records.
• Name, address and phone number of employers for the last two years. The lender may want to verify your employment with them. If you have had multiple jobs during the last two years, take the contact information for each job.
• Most recent two months' pay stubs. Certain loans, because of the large amount of money involved, will require a verification of income. You won't get a loan if you can't show that you have enough income to be able to make the monthly payments. Other loans may not require this, specifically unsecured personal loans for small amounts (in this case we will say that $2000 is a small amount) but you should take it just in case. It is better to be prepared than have to leave and return again to make sure that the loan processes.
• Income tax returns for the last two years. The reason for these is basically the same as the reason for the last two months pay stubs. The lender especially likes to see the tax returns of people that work in a position that has a base salary and receive commissions. If they were to rely on just the pay stubs, a salesman could have two really good months and then go to a lender and secure a hefty loan because of a large sum of income during the previous months. But what if the rest of the year is dismal as far as earnings are concerned? The bank wants to have verification of your yearly income, not just monthly, to make sure that you will be able to pay it back.
• Credit card account numbers and balances. This isn't commonly asked for because the same information is available on your credit report that they will request from the credit bureaus. You may want to take this information with you though, or at least call ahead and find out if it is necessary.
• Banks' names and account numbers. This information is used for the same reason that they want your credit card accounts and balances. The lender will look at what you already have available to you to help determine if you need as much as you are asking for. If you have a high credit score and good credit history then you probably don't need to worry about it as much. But do take this information with you because it may not be on your credit report.
• Business and personal references. If necessary to make a decision, they will check on these references to see if you are responsible and trustworthy. Because of this, choose your references wisely.
• Money for the loan application. If a fee is involved, the lender may want you to pay it separately from your own funds. It shows them some financial responsibility. Many times the application fee will be built into the amount of the loan. Sometimes the lender may waive the application fee because of the amount of money they will earn from the interest paid. This is something you will want to find out before you go.

In reality you may not need all of the items listed above. But you don't want to go empty-handed either. Some items, such as the drivers' license and Social Security card are almost always required. Do a little bit of research to find out what you need to take with you. It could be a simple phone call to the lender or maybe a look at the lenders website (if they have one).

Conclusion

Becoming informed through research prior to applying for a loan will save you a lot of stress and maybe a few headaches. More importantly it could save you a lot of money because you will be able to pick the right loan for your needs. The time you spend will be well worth the effort. The preparation time may speed up the application process, the loan processing time, and give you some peace of mind knowing exactly what you are getting yourself into.

Managing Debt

  Managing debt...isn't the phrase an oxymoron of sorts? Seriously, if you are managing your money, you shouldn't have much debt, or at least what debt you have will be under control. And if you are good at managing debt, does that mean that you have had a lot of experience with it? Hopefully not! Debt management is a skill that should be acquired because you have acquired or plan to acquire debt. The results of debt management should be the elimination of debt, not the ongoing management of revolving debt.

In the workplace, the definition of a good manager portrays a person that can supervise, motivate, take control of situations, provide leadership, allocate resources where needed, and eliminate excess (including expenditures) when and where necessary. Each of those characteristics will help make you better at managing debt, but you don't need to have them all to succeed. This article will help you to acquire skills that you don't already have, and hopefully improve on the ones that you do, as you work to manage and eventually eliminate the debt that you have.

Principles that will be discussed in this article should already be familiar to you. But even if they aren't, you will be able to get a good understanding about what you can do to help put you in a better financial position and continue on that way. Sound principles of debt management, when properly used, will become a long-term asset that will help you accomplish goals that you may have for the years ahead.

What You Need To Manage Debt

Consumer Debt is a problem that has grown so much over the last few years that an economic crisis is throwing a lot of people into a panic. Subprime mortgage lending, stock market declines, energy price increases, and many other things are making those debts incurred under a good economy seem like poor decisions. Frankly, it shouldn't take a failing economy to make one think that a particular debt was a poor decision. But, thanks to those that weren't prepared for economic downfall, we now have one industry that is booming. Which one is it? Debt management companies. And they want to help you out. Before you accept their help, learn about what you can do on your own. You might realize that you don't need their help. But just in case you do, some tips about choosing one are also included in this article. In the meantime, let's focus on helping you manage your debt on your own.

What do you need to be able to manage debt? First of all, you need debt. This article will not teach you how to acquire debt. You can probably handle that just fine on your own. Next, you are probably thinking that you need money to manage your debt. Well, you are wrong. If you had money in the first place, you shouldn't have debt. Unless you win the lottery or inherit your favorite great-uncle's estate, you won't be getting rid of debt real quickly either. That is why you need managing skills. Yes, that is what you need to manage debt: Skills. A little bit of faith and perseverance won't hurt either.

Once you start learning the skills involved, you can get to work on managing your debt. This should be a personal goal. If you don't make it such, you will have a harder time getting control. Goals are what drive humans in the direction they want to go. If you want to manage the debt you have and become debt free, work to get control. If you don't get involved and instead turn it all over to someone else, you are not going to learn what is necessary to keep your debt minimal.

So don't turn to those companies that want to do it for you. Real debt help, the kind you need, is only found in changing your behavior. Changing your financial behavior, and changing your life, is a long-term investment in time and effort. You make a change for the better and continue on that path rather than return to the same problems down the road. True debt management is about you controlling your money.

Will it be easy to make changes and learn the skills needed? No, in fact it will be a bit difficult. But anything that is truly worth having is worth working for. So decide now, do you want to work towards having a lot of debt or eliminating what debt you already have?

Step 1: Making a Plan to Get Out of Debt

Many people who have debt don't think about it. They will get the bills in the mail and make the minimum payments without much thought of paying off the whole balance. This is not how you go about making a plan to get out of debt. Showing an interest in debt elimination and finding out how to create a plan will actually get you there.

Making a plan to get out of debt is much like creating a budget. What, the ugly "B" word? Don't shy away from it because it will be the most powerful financial tool you create on your own. However, since this isn't an article on how to create budgets, we won't go into a whole lot of details about it. We will however mention some budgeting basics that will help you get out of debt.

First of all, you need to figure out what your monthly earnings and expenses are. But take the expenses portion one step further. Write down the different accounts that you have to pay on, the order they need to be paid, and how much money you need to eliminate that debt. Knowing the order they need to be paid is the trickiest part. You may think that the order is already determined by the due dates given on the bills. Well, that isn't necessarily the case.

The order that the debts need to be paid should appear something like this: house or rent payment should be first (don't jeopardize the roof over your head), utilities, groceries, medical care, car payments, secured loans, and then finally the unsecured loans and credit cards. You may think that paying off the credit card is helping you to get out of debt, right? If you have the money to pay all of your bills, then yes. But what happens if you fall short on money (because of an unexpected circumstance) and you aren't able to make a house payment or buy food to eat because you paid off the credit card? There are times when debt management means that you don't pay off a debt so that your money is managed in the best way possible.

Most of your debts will come in the form of loans. Mortgage loans, auto loans, student loans, etc. These are all great and can be a big benefit when you get them, but they need to be paid off. Part of the plan for getting them paid off is to focus on one debt at a time. You still make regular payments on all of them, but only focus on paying off one at a time. You may want to pay off the loan with the highest balance first. Or you may want to pay off the loan with the highest interest rate first. Which ever method you choose, stick to it. And when it is paid off, you take the money that you had been applying to that debt and apply it to the next debt that you want to pay off.

Step 2: Changing your financial behavior

Ask yourself each of the following questions:

1. Can I only afford to make minimum payments on my credit cards?
2. Do I worry about finding the money to make monthly car payments?
3. Do I borrow money to pay off old debts?
4. Have I used a home equity loan to refinance credit card debts, and then run up new revolving balances on my cards?

If you answered "yes" to one or more of these questions, you are definitely in need of a change to your financial behavior. Even if you answered "no" to each question, you may still need to change your financial behavior to eliminate the debts that you have. So how will you change?

You may not even know what you need to change without making an assessment on your situation. Look at your debts. Evaluate how bad the situation really is. After all, if your credit card debt exceeds that of a small country, you need to know ahead of time so that you can be prepared. This is something that will actually take place as you create a budget if you are going about it correctly.

As you make your assessment on your debt, you will be able to identify what your spending habits are. Making such identifications will show you where you can cut back. But this step is more than an identification process. It also involves a change in attitude. This isn't to say that you have a bad attitude, it means that the attitude that you take towards certain purchases you make is what needs to change. This type of an attitude change could simply be recognizing that certain purchases are selfish purchases that don't need to be made at all. It is basically a needs verses wants comparison. The attitude change that generally takes place with this process is a realization that you have to sacrifice and give up the things that you want to provide the needs. In this particular case, giving up what is creating debt because of the need to eliminate debt.

At this point the change in attitude, the assessment of debts and spending habits, and the creation of a budget will set you on a path to successful debt management and elimination. Now you should put it all to work and eliminate or at least reduce expenses that are lowest in priority. Doing this will naturally lead you into eliminating bad habits that helped to create the debt you now need to get control of.

Step 3: Eliminate Bad Habits

Okay, by this point you know that you need to change your financial behavior. You've made an assessment of where things stand. You may have even identified areas of spending that you can eliminate. But what about the bad habits you have that affect your credit history and debt levels? There are habits that you may have that add to your debt problems without you even realizing it. Let's look at a couple that could be hurting.

Other bad habits that may need to be considered for elimination are: procrastinating the creation of an emergency fund, paying the bills in no particular order rather than in order of priority (housing should always come before credit cards), charging purchases when you have the cash to pay for them (you will probably spend the cash on something else rather than pay the card bill), paying credit cards late (the finance charge will make the balance increase faster than a minimum payment can pay it down), and making only the minimum payment (interest has the same effect as the finance charges).

Debt Management Companies

If you feel that you can't manage it by yourself, that you need to get professional help, you do have that option available to you. But before you move in that direction, you need to know what to expect and what you should ask.

First of all, debt management companies like AmeriDebt and Consumer Credit Counseling Service do not work the same as getting a debt consolidation loan. A debt consolidation loan is managed by you. A lump sum of money is given to you to pay off your debts and you are left with one bill to pay instead of ten. Sometimes the interest rate is better which is to your benefit but in the end you are still paying for all of those debts. If you get a mortgage equity loan to use for debt consolidation, you may have additional tax benefits. But no matter which type of loan you use for consolidation, you still have to manage the debt.

With companies like AmeriDebt and CCCS, you will pay them a lump sum once a month and they will make payments to the creditors you owe. Some debt management companies will make their profits because they have worked out lower rates with your creditors making it possible to cover your bills and allow them some earnings. Wouldn't you like to be in that situation yourself? Look at a consolidation loan. But if you really want some help, visit one of these companies.

There are critics of debt management companies that will tell you to stay as far away as possible. They may tell you that your credit score will be ruined. It may happen, it may not. Some critics will say that using a debt management company is like filing bankruptcy. True or false, I don't know. And since I can't tell you what to think and decide, I would rather give you some information that will help you make that decision yourself.

CCCS counselors can work with you privately to help you develop a budget, figure out your options, and negotiate with creditors to repay your debts. Add to it the benefit of them being non-profit agencies that won't charge you fees. Even better, they work with you, so you get to learn the debt management skills that you will need for the rest of your life. To locate an office near you, call 1-800-388-2227. There are also national credit counseling non-profit agencies that you can get help from. Community Cooperative Extension offices may be able to help as well. You can find these in the government pages of your phone book (if they exist in your area).

If none of these are readily available, you will have to go with the agencies that work for a profit. As you look for help from them, consider the following:

1. What services do they offer? You should look for an organization that offers a wide range of services, including budget counseling, savings and debt management classes, and counselors who have been trained and certified in consumer credit, budgeting, money management, and debt management. The more services they offer that are geared to helping you develop the skills needed to manage finances on your own, the better off you will be. You can feel more assured that they have your best interest in mind.
2. Are they licensed to offer their services in your state? Some states require it. You should know if your state is one that requires licensing and then find out if the organization is licensed. If they are not licensed, stay away.
3. Do they offer free information? You should avoid any organization that charges for information about the nature of their services.
4. Will you be able to have a written contract? This is very important because there are some scam organizations out there. Do not commit over the phone. Get all verbal promises in writing. Read all documents carefully before signing them.
5. What are their qualifications? Do they have counselors who are licensed? Are they accredited or certified by an outside organization? How are they trained? You will be better off with counselors that are trained by outside organizations rather than the creditors.
6. What are the fees? Do the fees change based on the services you sign up for? Have other consumers been satisfied with the service? And most importantly, what do they do to keep your personal information confidential?

The Federal Trade Commission has information to help you with your debt management. They have articles that you can read that will help. They also work to prevent fraudulent organizations and unfair business practices. If you would like to get information about a debt management organization or would like to report unfair practices, contact them at 1-877-FTC-HELP or go to their website at www.ftc.gov. Be informed before you ask someone else to manage your debt.