mod 10 + 11 pf

pay your bill early

Even if you have done all you can to keep your credit card expenses in line and to pay your bill on time, unforeseen events can occur. When that happens, call your credit card company. If you have not been late with a payment before and forgot to pay a bill, it may waive the late payment penalty. If you are experiencing a family crisis or lengthy illness and you are having difficulty paying your bill, call your credit card company. Explain your situation and ask the company to work with you to find a payment option that will work. Companies want to assist you so you can pay your bill. Contact them as soon as you think you may have a problem paying your credit card bills—and cut down immediately on discretionary spending.

Keep It or Chuck It?

Filing is a great habit to get into—but you do not get too carried away. It is also important to shred old documents when you do not need them anymore.1 So, how long is long enough?

Banking Basics

Imagine trying to get along in a world without money. Here is a scenario. You are off to the mall to buy a new pair of sneakers. For payment, you bring along a bag of apples from a tree in your backyard. The bag is heavy, but even worse, the shoe store owner does not want any apples! Instead, he wants a few bags of flour to bake bread. So, before you can buy your sneakers, you have to find someone willing to trade a few bags of flour for your apples. Sound complicated? It is—and it was! Around the world, before people began sharing a common domestic currency or system of money, they relied on a complicated system that involved barter—or trade. The money we use today, and the banking systems that support that money, are the result of a series of historical events. As in the apples-to-sneakers scenario, life without money would be pretty challenging. Without a shared system, trading goods and services would be quite difficult. So, it is not a surprise that humans developed money systems pretty early on in history. Archaeologists have found records of humans using cattle and basic crops as money dating back 11,000 years ago.1 Since it was impossible to stick a cow in your pocket or to travel long distances with it, people eventually developed forms of money that were smaller and easier to carry around. Cowry shells, like the ones pictured here, were a popular form of money in China and Africa approximately 3,000 years ago.2 In other parts of the world, whale teeth, tobacco, and stone disks were used as money, too.3 What about the shiny stuff? People began using metal for coins in China around 1000 B.C. But, it would not be until around 500 B.C. that Mediterranean countries began making round coins similar to the ones we use today. It is believed that the early Lydians (in modern-day Turkey) were among the first to use precious metals—like gold, silver, and bronze—and the first to stamp their coins with words or images of important people.4 What did all these forms of money have in common? Whether they were shells, lumps of bronze, teeth, beads, or paper, they shared a few important traits: the people using them agreed on their value, and the items were relatively easy and convenient to transport and trade. Money also made it easier to borrow, save, and compare the value of goods and services. So, if you were lucky enough to be a rich person long ago, you might have had a lot of coins, which would have posed its own special problem. Bags of coins are heavy and hard to haul from place to place. Hauling large bags of money also would have made you a perfect target for thieves. The solution? Rich people stored their coins somewhere safe. When it came time to pay for something expensive, they would hand over a slip of paper, sometimes called a bank note, which the recipient could use to collect the coins later. Those "safe storage" places for coins became the first banks. The people who exchanged the bank notes for coins became the first bankers. And those bank notes were the first forms of paper money. These systems first showed up in China around 1,200 years ago, and they were common in Europe by the 18th and 19th centuries.

Savings Account Fees

Isabella also has to be aware of fees. Some savings accounts have a required minimum balance. If the savings account goes below that minimum balance, a fee is charged. Other savings accounts have transfer fees—meaning that she can transfer money from one account to another for only a specified number of times per month. If she exceeds this number, she will be assessed a fee. When selecting a savings account, carefully read the disclosure statements so you are aware of the fees. Paying fees decreases the amount of money you have.

Calculating Interest Earned

Isabella compared three financial institutions and chose the one that works best for her. Now she learns that her new bank calculates interest in different ways. The teller mentions that the bank offers savings accounts with simple interest or compound interest. Isabella asks the teller to explain the difference. Let's see the difference between simple interest and compound interest.

Comparison Shopping for Credit Cards

Module 118 introduced the credit disclosure agreement—a full write-up of all terms and conditions for a debit card or credit card. Often, with an online application for a credit card, one section or tab will be labeled terms and conditions. You should review these very carefully before applying for the card. Later, when you receive the card in the mail, the credit card company will include the complete account disclosure statement with the credit card. Below is a table of terms and conditions from a sample credit card application. Read through the table and roll over terms to see their definitions. When you feel comfortable with the terms and conditions, test your understanding with the scenarios in Activity 119.1. Credit Card Terms and ConditionsInterest Rates and Interest ChargesAnnual Percentage Rate (APR) for purchases:17% APR—The APR will vary with the market based on the prime rate.APR for balance transfers:17% APR—The APR will vary with the market based on the prime rate.APR for cash advances (money withdrawn as cash from ATMs or from a bank)—Cash advances are the same as a credit card company providing a cash loan:24%—The APR will vary with the market based on the prime rate.Penalty APR and when it applies:27%—The APR will vary with the market based on the prime rate.This APR will apply to your account if you1. make one or more late payments; or2. make a payment that is returnedHow Long Will the Penalty APR Apply? If the Penalty APR is applied, it will last for at least six months. Your account is reviewed every six months after the Penalty APR is applied. The Penalty APR will continue to apply until you begin making timely payments with no returned payments during the six months being reviewed. The Penalty APR will apply to existing balances only if a payment is more than 60 days late.Paying Interest: Your payment due date is at least 25 days after the close of each billing period. You will not be charged interest on purchases if you pay your entire balance by the due date each month. You will be charged interest on cash advances and balance transfers on the transaction date.Fees: Annual Fees, Transaction Fees, and Penalty FeesAnnual Fee:$0 for the first year, then $95Transaction FeesBalance Transfer:either $5 or 3% of the amount of each transfer, whichever is greaterCash Advance:either $5 or 3% of the amount of each cash advance, whichever is greaterForeign Transaction:2.7% of each transaction after conversion to U.S. dollarsPenalty FeesLate Payment:$35Returned Payment:$35Overlimit:$0 Payments Minimum Monthly Payment:5% of the balance or $25, whichever is greater—failure to pay the minimum balance can result in cancellation of the credit card You may want to determine how much interest will be charged to a balance for one month based on the APR. Remember, APR is the percentage at which interest is calculated for one year. To get the percentage at which interest is calculated for one month, simply enter the APR as a decimal and then divide by 12 months. Consider this simplified example. Your credit card has an APR of 20%. If you had a balance of $300, made no payments, and the interest accrued annually, then you will accrue $60 of interest. How much is accrued per month though? First, write the APR as a decimal. In this example, 20% becomes 0.2. Then, divide the decimal by 12, the number of months, to get 0.016667, or 1.67%. You can use this decimal to determine how much interest accrues monthly. In this example, $300 multiplied by 0.0167 will result in $5. To check if this is the monthly rate, multiply $5 by 12 months to find the annual interest accrued of $60.

Protect Yourself with Knowledge

Of course, it is important to understand the terms of any loan you take out. You should compare different loans and credit cards before you agree to anything. In Module 119, you will learn about the different ways to compare loans. Learning the laws related to credit and debt can help you develop and protect your credit rating. Here are some examples: The Fair Credit Reporting Act regulates consumer reporting agencies and the use of consumer credit information. The Fair Credit Billing Act protects consumers against inaccurate and unfair credit billing and credit card practices. This act also requires credit card companies to respond to consumers' requests to check on any billing errors. Sometimes, the consumer may be wrong, in which case, it is not really an error. But, the act requires the credit card companies to check out the consumer's concerns. The act offers a protocol for contacting credit card companies and challenging inaccurate billing statements. The Equal Credit Opportunity Act makes it illegal for creditors to discriminate against a credit applicant on the basis of race, color, religion, national origin, sex, marital status, age, or because the applicant receives public assistance. The Fair Debt Collection Practices Act prevents abusive and deceptive practices by debt collectors, such as misrepresenting themselves as law enforcement or reporting false information.1 The Card Accountability, Responsibility, and Disclosure (CARD) Act bans unfair rate increases and unfair fees. The act also requires that credit card contract terms be presented to consumers in clear language and ensures accountability from credit card issuers and regulators.2 Once you have established credit, you may receive offers in the mail, even if you have not asked for them! Some of them might even be preapproved. This might sound good, but you could be playing with danger. For example, someone else could fill out an application in your name and then use the resulting credit card. That same person could change the address on the card so that the bill does not get sent to you. It could take a while before you even realize that someone has borrowed money in your name and is not paying the bill. There is a way to protect yourself. You can opt out of receiving credit card offers for increments of five years. You can opt out online or call 1-888-5-opt-out (1-888-567-8688). Also, having several credit cards does not always equal a better credit rating. Each one can be a potential drain on your resources. Read Your Bills If you find an error on your bill, use the provisions of the Fair Credit Billing Act to address them. Contact your creditor at the actual (mailing) or Internet address or at the phone number given for billing inquiries. Then follow the directions for disputing unauthorized charges, such as charges for goods or services you did not receive, math errors, missing postings, or missing bills. Additional Resources The Federal Trade Commission offers free information about choosing a credit card and about credit and consumer rights. www.ftc.gov (Links to an external site.) The Federal Reserve System offers a free method for calculating how long it would take to pay off various bills.www.federalreserve.gov (Links to an external site.) Bank Rate, an online site, supplies free credit card tips and information.www.bankrate.com (Links to an external site.)

Budgeting and Prioritizing Bills

Once you have a method for keeping accurate financial records, you can use that information to plan a budget. A budget will track your expenses and help you make sure your most important bills are paid first. First, choose a time frame for your budget. Most bills must be paid every month, so it makes sense to create a monthly budget—and then stick to it! Use the budget to set your priorities. The most important bills likely will be your rent or mortgage, utilities, and food. Also, make sure to save some money for emergencies. Here are some valuable tips to use when prioritizing your bills. Roll over each one to find out more.

Credit Ratings

So, who is keeping track of your financial life? Credit bureaus, also known as credit reporting agencies (CRAs), keep track of your spending and bill-paying habits. There are three main credit bureaus: Experian TransUnion Equifax A credit report incorporates your bill-paying history and other data. Any lender that lends you money or provides you with credit can share your bill-paying history with a credit bureau. The report does not state whether you are a "good" risk or a "poor" risk. Nevertheless, the information on the report can be used to decide if you are creditworthy. You will learn more about credit reports in the next module. Another tool a lender uses to determine your creditworthiness is your credit score. This three-digit number is calculated by looking at the data in the credit report. You will learn more about credit scores in the next module.

The Five C's of Credit

The Five C's of Credit are factors that determine your creditworthiness: character, capacity, capital, conditions, and collateral. In Module 116, you learned about several of these factors. A lender looks at each one when determining whether or not to extend credit to an applicant. Through this credit analysis, the lender makes an informed decision based on these five factors. Each factor is explained below. Character refers to a borrower's reputation and history of paying obligations. Does the lender see you as a trustworthy person with integrity? If you do not present yourself as honest and dependable, the lender will not want to lend you money. Capacity refers to a person's ability to repay debt. Capital refers to savings and other assets you can use as either a down payment for a loan or to repay your debt. Suppose you are applying for a home loan. If you can offer to make a large down payment, you are more likely to get the loan. Why? The lender is more confident you will pay off your loan because you have more to lose if you default. Even if you do not make a large down payment, having capital helps you get a loan because lenders view it as an indicator of reliable repayment. Conditions refer to other circumstances that may make it easier, or harder, to obtain credit. One example of a condition is the economic outlook, which affects your ability to borrow money. For instance, if you live in a county that has a strong economy, it might be easier to get a loan because lenders know that your region has job prospects and other opportunities. On the other hand, if you live in a county where the economy has suffered a setback, borrowing money might be more difficult. Collateral refers to assets, such as property, that a borrower can use to repay the lender if repaying with cash is not possible. Suppose, for example, that your home needs a new kitchen and bathroom. You decide to borrow $55,000 to make these improvements. However, the lender may require you to use your home as collateral for the loan. The lender knows that if you cannot pay back the $55,000 (plus interest), your house can be used to repay the loan. Lenders know the borrower does not want to lose the collateral, so this helps ensure that the loan will be repaid. A cosigner is someone who signs a lease or loan with you. This person agrees to pay the bill if you do not. If you have a cosigner on a loan, you may not have to put up collateral; in these cases, the cosigner will put up the collateral. In addition to risking the collateral, the cosigner runs the risk of getting a bad credit rating if the loan defaults. Remember, maintaining accounts for a long time demonstrates stability to lenders. To maintain a good credit rating, you should keep accounts open for as long as you can. For example, if you have a credit card with a low or no annual fee, you should keep that account active for a number of years to show that you can responsibly manage your accounts. Another factor that can affect your credit rating is the number of inquiries into your credit history. When you apply for a loan, you also authorize the lender to obtain a copy of your credit report. This way they can assess how much of a risk you are. This is a necessary part of financial life since you will likely need loans for education, a car, a home, and other big-ticket items. However, the more credit you look for, the more risky you will appear. Therefore, keep the number of credit inquiries to a minimum in order to strengthen your credit rating. Having a high number of credit inquiries, especially in a short period of time, can hurt your credit rating.

Pitfalls of Credit Cards

Credit cards give you a lot of financial power. But, when used improperly, they can get you into a lot of trouble. Earlier, you learned some of the costs of using credit cards: fees for late bill payments annual fees for having a card overlimit fees for charging an amount over your credit limit interest charged on balances and cash advances But, the biggest costs of credit cards occur when people overspend on their cards.

Strategies for Building a Strong Credit History

To build a strong credit history, make some rules for yourself about how to use your resources, including both cash and credit cards. If you stick to certain rules, such as the following, every purchase and payment will count.

What Is a Bank?

A bank is a financial institution that accepts deposits from its customers and, in turn, provides loans to its customers. Commercial banks offer a variety of services. Along with checking and savings accounts, banks also offer mortgage loans and even credit cards. Most banks are insured by the FDIC (Federal Deposit Insurance Corporation); recall from previous lessons that this means every customer who deposits money into an FDIC-insured bank is insured for the amount of that deposit (up to $250,000). Banks also offer ATM cards and debit cards, which allow customers to spend money directly from their checking or savings accounts without using cash or writing a check.1, 2

Getting Information on Your Credit Rating

A credit report and credit score work hand in hand to provide a picture of your credit rating. This module explains how credit reports are calculated and who calculates them. Of course, any report can have an error. Because a credit report is used to make decisions about you, it is important to know how to find and correct any errors in it.

Credit Reports

A credit report is a detailed compilation of an individual's credit history. This history presents information on whether you pay your bills and loans on time (and in full), the total amount of debt you owe, and how much credit you have available. The report does not state if you are a "good" risk or a "bad" risk. Instead, people who use this report make this determination. The following types of information are included in a credit report: Personal information—name (including any previous names), date of birth, address (current and previous), telephone numbers, employers (current and previous), Social Security number, and spouse's name (if married) The types of debt the person carries—loans, installments, and/or credit cards The total amount of debt the person owes Specific information for each revolving account—the name and number of the account, the date the account was opened, the balance, any amount past due, the current status (if the account was closed), and the credit limit Payment history—a summary of payments. Were the payments on time or late? If they were late, how many days late? Any debt that has been turned over to a collection agency The amount of debt due on a monthly basis The amount of credit available to the consumer Any negative account information Any disputes about potentially inaccurate information in your credit report Any requests the consumer has made for additional credit Inquiries—generally either one of two kinds: (1) Hard inquiries impact your credit record. Hard inquiries are used by potential lenders—for example, when you apply for a credit card or when a bank considers you for a car loan. (2) Soft inquiries do not impact your credit record. These occur when someone requests your history—for example, when a landlord investigates your creditworthiness, or when a company tries to confirm your identity. Public information—including bankruptcies, lawsuits, foreclosures, or liens. A foreclosure occurs when someone defaults on a loan and the lender goes to court to gain possession of the property. For example, if a homeowner has a mortgage and does not pay according to the terms of the contract, the lender can legally foreclose on the house. To repossess property means that the lender has the right to take away the property if the borrower does not follow the terms of the contract. For example, if you buy a car and do not make the payments on time, the bank can repossess the car. Liens are a legal right to claim another's property to pay a debt. For example, if you hire a plumber to fix the water heater in your house, but you refuse to pay for the repair, the plumber can put a lien on your house. This means you are not allowed to sell the house until the debt has been paid.

What Is a Credit Union?

A credit union is similar to a bank in that it accepts deposits and makes loans; however, unlike a bank, it is operated on a not-for-profit basis and is owned by its members. A credit union typically offers higher interest rates on savings accounts and charges lower interest rates on loans than a traditional bank. How can it do this? Since credit union members own the financial institution, the credit union is not driven by profit and can offer better rates. The NCUA, or the National Credit Union Administration, insures and regulates federal credit unions. So, the deposits of credit union members are insured—just as the FDIC insures banks.

Debt Settlement

A debt settlement company works on your behalf to reduce the amount of your unsecured debt. This is a negotiated arrangement with your creditors. The reduction can be anywhere from 40% to 60% of your outstanding debt. Credit card companies often will approve this type of settlement because it may be the only way they can receive at least some of their money. This arrangement is not in the best interest of the credit card company because it will not receive the full amount due. However, if you file for bankruptcy, the company will get nothing. Remember, filing for bankruptcy is a last resort option and will definitely negatively impact your credit report and score for years. Debt settlement companies have been known to make promises they cannot keep. Before you allow them to help you, make sure you know the following: What services do they offer? How much do they charge for their services? When do you pay for these services? When can you expect to see some results of their negotiating efforts? How long will it take for your debt to be paid down? Get their promises in writing and understand them before you agree. Debt settlement companies make money from the consumers and the credit card companies. They do not work solely for you. Check them out by contacting the same consumer protection organizations listed on the credit counseling section from the previous screen.

Credit Rating Perks and Pitfalls

A good credit rating comes with many benefits. Here are some examples of how good credit can work in your favor and save you money every year. A good credit rating may allow you to get credit cards with better terms, which means lower interest rates. You may avoid paying a yearly fee on your credit card. It may also lower your insurance premiums. A good credit rating can improve your job prospects. Employers often check a prospective employee's credit rating to help determine whether that person will be reliable and responsible. A poor credit rating implies you cannot be trusted with resources. This makes it difficult to get a credit card, insurance, or a job. Even if you do find employment, a poor credit rating can restrict your security clearance and limit your responsibilities at work. Bad credit can be an obstacle to "getting ahead," but credit can be repaired over time with responsible borrowing habits.

Life Without Financial Institutions

As an adult, it is possible to get by without using financial institutions. But it is not easy, and it is expensive. In fact, only a small handful of banking institutions do not charge a fee to non-customers for cashing a check. Also, there are non-bank institutions that help people access money, but their fees are much higher. Consumers who do not have bank accounts sometimes choose to use check-cashing services when they need to cash a check. But, at a check-cashing store, the fees can be quite high.1 For a person who takes home $25,000 per year, cashing paychecks could cost $1,000 per year—or much more—compared to depositing the checks in a bank account, which would cost much less. If you need a loan, it is much more expensive to use non-bank institutions, such as payday loan stores. When you go to a payday loan store for a loan, you write a check for the amount of the loan plus a fee. You must promise to return to the store by your next payday to repay the loan. If you do not show up, they cash the check. The fees charged by the store are almost always higher than standard bank interest rates.

Filing for Bankruptcy

Bankruptcy is the last option for consumers who are in deep financial debt. It has long-term ramifications for those who file. The two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. Bankruptcies are usually named for their respective sections of the U.S. Bankruptcy Code, Title 11. The laws about bankruptcy also are included in this code and in Federal Rules of Bankruptcy Procedure. In most cases, an individual files for bankruptcy voluntarily; however, creditors can force debtors into involuntary bankruptcy. By borrowing money, you have made a promise to pay it back. You should make every effort to pay back your creditors; however, in some cases, it may not be possible. Bankruptcy protects debtors from creditors and provides a way to have some debts forgiven, or discharged. This should be the last option on your list of ways to resolve a financial crisis. A consumer should consult an attorney for advice on when and how to file for bankruptcy. It is important to understand bankruptcy before filing because it will negatively impact one's credit rating and ability to apply for a loan. This will be reflected in the individual's credit history—showing that the person is a credit risk. Bankruptcy can also impact an individual's ability to lease an apartment, get a job, or get a promotion at work.

Getting Legal Assistance When Filing for Bankruptcy

Bankruptcy law is complicated. Administrative personnel from the U.S. federal courts cannot provide a debtor with legal advice about their specific situation. This type of advice and counsel must come from an attorney, accountant, or financial advisor. Businesses must have an attorney when they file for bankruptcy, but individuals do not have to have one. If individuals file without an attorney, they file as a pro se litigant. A litigant is a party in a lawsuit. Because of the complex nature of filing bankruptcy documents, it is possible for an individual to make a mistake in the paperwork or to leave out an important document, and the case will be dismissed because of a technicality. Filers can lose their rights if they make an error, so going at it alone is not advised for most people. Bankruptcy has long-term implications for an individual's future; so, if he or she goes at it alone, it is important to be knowledgeable about the U.S. Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and local court rules governing bankruptcy. A judge can deny a case if the litigant hides or falsifies documentation. This could be considered fraud, which is a crime. Bankruptcy cases are randomly audited, so it is important to be honest, complete, and accurate. If the individual decides to hire a legal counsel, it is best to find an attorney who specializes in bankruptcy law. If an individual does not have the money to hire an attorney, he or she could be eligible for some free legal help from the state or local bar association, the American Bar Association, or a law school or local college. When a lawyer offers free legal advice to a litigant, it is called pro bono. Check out your local bankruptcy court Web site for information on pro bono help and other information about filing procedures.

Cash Strategies

Budget your cash so that you have enough to last from payday to payday. Include in your budget all regular expenses and a certain amount of "emergency money" so you can address unexpected expenses without going into debt. Each pay period, set aside savings for big-ticket items—such as a bicycle, car, or electronic item—that you may want or need in the future.

Automated Teller Machines (ATMs)

Can you imagine a world without ATMs? It would be hard, especially for Taylor, who wants to be a neurosurgeon. As a neurosurgeon, he will most likely need access to his money wherever he goes. An ATM is used for electronic monetary transactions. By inserting a plastic debit card that either has a magnetic stripe or a chip into the ATM, Taylor identifies himself and his accounts to the machine. A debit card can be connected to your savings account, your checking account, or both types of accounts. It is very important not to share your identification information—often referred to as a PIN, or personal identification number—with anyone. There can be fees for using ATMs. Typically, if the ATM transaction is with your bank or credit union, there is no charge. But, if the ATM transaction is with a different bank or credit union other than your own, there typically will be a charge ranging between $1.50 and $3.00. It is important to have enough money in your account at all times to cover your outstanding checks that are tied to an account; it is also important to have enough money in your account to cover all of your ATM withdrawals. Some banks and credit unions offer overdraft protection services. Generally speaking, if there is not enough money in your account each month, the bank or credit union might suggest you sign up for their overdraft protection. Let's learn about opting in and opting out of overdraft protection.

Financial Terms in Plain Language

Carry a balance: If you do not pay the credit card company the full amount of your bill, the money you owe is the balance. For example, if you buy something in January for $100 and pay only $90 when your bill is due, your balance will be $10 until you pay your next bill. When you do not pay your bill in full at the end of the billing cycle, it is called carrying a balance. As long as you have the balance, the credit card company will keep charging you interest on it from month to month, plus any new purchases you make. Annual fee: You must pay this fee to the bank or credit card company when you receive the card. The fee is automatically charged to your account at the start of every year whether you use the card or not. Debit card purchases: When you use a debit card to make a purchase, the money is removed from your checking account as soon as the transaction clears (this can take a few days for the bank to process). When you make a purchase with a credit card, you do not have to pay back the money until your monthly credit card bill is due—in between the time you make a credit card purchase and the date when your bill is due, your money remains in your checking account. Overdrawn account: If your debit card purchase is more than the amount of money you have in your bank account, your bank may allow you to make the purchase. However, it will then charge you a fee for not having enough money in your account. This is an overdraft fee. Some banks let you opt out of the bank's overdraft protection plan. If you opt out, the bank will deny your purchase but will not charge you an overdraft fee. Returned check fees: This fee is charged to customers when they write a check for more than they have in their checking accounts; this is also known as a bounced check fee. In this instance, the bank will not pay any money to the person to whom the check was written. The bank also will add charges for the amount of the check and the returned check fee to the account of the customer who wrote the check. No fee/no balance credit card: This type of credit card does not charge an annual fee. The consumer pays all the charges on the bill (does not carry a balance) every month.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is different from Chapter 7 because these filers must repay their creditors. In October 2005, Congress made changes to the bankruptcy laws that encourage citizens to file Chapter 13 versus Chapter 7 bankruptcy. This means that the filer, if employed with a steady job, uses his or her future earnings to repay his or her debts over three to five years. This is a win-win situation for everyone because creditors get paid and the filer can keep all of his or her assets. After filing Chapter 13, a repayment plan is devised and approved by the court. The trustee then monitors the process. Creditors actually protect the debtor from any further lawsuits while the plan is in place and the payments are being made. Once all creditors have been reimbursed, the filer receives an official discharge of the debt by the court.

Chapter 7 Bankruptcy

Chapter 7 of the U.S. Bankruptcy Code provides for "liquidation" (i.e., selling a debtor's nonexempt property and giving the proceeds to creditors). Chapter 13 provides for adjusting the debts of an individual with a regular income. Chapter 13 allows a debtor to keep his or her property and pay debts over time, usually three to five years.

Making Wise Financial Choices

Choosing the right card is just the start of your financial journey. If you choose wisely, pay your monthly bill on time each month, charge only what you can afford to repay, and keep your balances low, you could earn a favorable credit rating. Be careful—just because your credit limit is several thousand dollars does not mean you can afford to spend that much! The scenarios below show how overspending can add up and get you into debt trouble.

Conspicuous Consumption

Conspicuous consumption refers to buying goods and services not for their intrinsic value but to impress others in hopes of improving one's social status. Conspicuous consumption can lead to spending beyond one's means, resulting in excessive borrowing and debt problems. The economic theory of conspicuous consumption dates back to 1899, when Thorstein Veblen (1857-1929) wrote a book titled The Theory of the Leisure Class.1 Veblen was born in Wisconsin, and his parents came to the United States from Norway. His formal education and training was in economics and he incorporated sociology and anthropology into his research and writing. He was affiliated with the University of Chicago and then later with Stanford University. In his book, he presented the idea that some goods or services are not consumed or used for their fundamental, or basic, intrinsic value. Instead, they are purchased to improve the purchaser's reputation or status. In these instances, purchasers feel like more costly goods or services give them more prestige.

What Is Involved in Consumer Credit?

Consumers have different ways to finance what they buy. They can use their savings, what they currently earn, or money they borrow. Types of consumer credit include the following: Noninstallment Credit—Noninstallment credit is either secured or unsecured, depending on the company offering the credit. This credit does not have monthly payments. Instead, the bill is due in a lump-sum payment for the full amount owed. Noninstallment credit tends to be due in a short period of time, such as a month. Installment Closed-End Credit—Installment closed-end credit allows the consumer to receive a certain amount of credit to purchase one item or a few goods. One type of installment closed-end credit is a car loan. The car company offers the consumer credit to buy the car. The credit does not extend beyond the sales price of the car. In addition, the person pays the credit in installments over a period of time instead of paying it back in one lump sum. Revolving Open-End Credit—Revolving open-end credit allows for purchases to be charged up to an approved limit, which is different for everyone. A monthly minimum payment is required, but finance charges are calculated on unpaid balances. One example is a credit card. When buyers use consumer credit, they have to consider the cost. The costs include finance charges, percentage rates, annual fees, and transaction fees. Most of the time these charges relate to revolving credit. Check out the information below to learn more about these costs. Consumers must remember that when they use credit, they promise to repay the amount borrowed plus any finance charges or other charges they have agreed to pay.

Credit and Debit Card Terms

Credit cards let you buy something now and pay for it later. If you do not pay your entire credit card bill on time, the credit card company will charge you interest. To avoid spending more money than they have, some people prefer to use a debit card. When you get a credit card or a debit card, you might just want the ease of purchasing. Remember, though, you are signing a legal contract with the bank or credit card company. Let's look at more credit card and debit card terms so you can see how they can influence you in real life. APR: The Annual Percentage Rate is a measure of the interest charged, expressed as a yearly rate. The APR takes into account the interest rate and the timing of the payments. Under Federal Truth in Lending laws, all lenders are required to disclose the APRs associated with an offer. Annual fees: Annual fees often are charged (on a yearly basis) for the customer's continued participation in an open-end credit plan. Compound interest: Balances on credit cards—built up by purchases, fees, and cash advances—are charged interest. The interest is recalculated continuously, meaning that interest is charged on the original amount and the accumulated interest. Penalty charges: A bank or credit card company will collect these charges from you if you violate the card contract. Two common penalty fees are the over-the-limit fee and the late payment fee. Over-the-limit fees may be charged to debit or credit cards. The fee is charged for exceeding the credit limit on the card. You can avoid this fee by opting out of the over-the-limit option. However, if you opt out, your card will be denied if you try to make a purchase over your credit limit. A late payment fee will be assessed against your account if the credit card company does not receive your monthly payment by the due date, as shown on the billing statement. Credit line (also referred to as credit limit): The credit line is the maximum amount of available credit a cardholder may access. The Consumer Federation of America suggests people carry credit lines no greater than 20% of their gross income. For example, people with a gross income of $50,000 should not carry credit lines of more than $10,000. Promotional incentive: To encourage you to use your card to make purchases, credit card companies may offer an incentive in the form of frequent airline flier miles, reward points, or cash back when you charge items on your card. When evaluating a card, read the contract to see what is required to receive the incentive and whether the incentive will expire. Account disclosure agreement: The account disclosure agreement describes the terms and conditions of your credit or debit card account. When you sign the application for a credit or a debit card, you are agreeing to accept all the interest rates, fees, incentives, and conditions described in the account disclosure agreement. Before you sign an application for a card, you should read the account disclosure agreement carefully. If you do not understand part of the agreement, call up the bank or credit card company directly.

Credit Cards vs. Debit Cards

Debit cards and credit cards enable you to make purchases without carrying cash. However, they work in different ways. When you pay with a debit card, the amount is deducted from your bank account right away. Your debit card is also your ATM card. It is sometimes called a "bank card" or "check card." When you pay with a credit card, your purchases go on your credit card bill. You receive a bill during the month and pay it at that time. You can often use your credit card to obtain cash at an ATM, but you usually have to pay a cash advance fee. Some cards can be used as either a credit card or debit card. These are called bankcards. You can choose whether to use this type of card as credit or debit. Let's define some financial terms you need to know to understand credit and debit cards.

Why the Bank Balance and Your Balance May Not Be the Same

Do not worry! Look over the transactions on your bank statement. As long as nothing looks out of place, there is probably not a problem. However, if you see a withdrawal you did not make—especially a large sum—contact your bank immediately. Even if everything is correct on your bank statement, chances are that your balance and the bank's balance will not be the same. You will need to reconcile your bank statement, which means matching your financial records with the bank's records. If you do this every month, you can keep things accurate and on track.

More Advantages and Disadvantages of Using a Credit Card

Establishing Credit When you use a credit card, you are creating a record of your spending and paying habits. If you pay your credit card bill on time and do not have an excessively large balance compared to the income you earn, you will positively affect your credit record. Future lenders will have access to this record to determine the likelihood of you paying them back. If you use your credit card wisely, you will establish good credit. Fraudulent Use When you sign your name and give your personal information to a credit card company, you become responsible for all charges made on your card—not just the charges you make. If someone else gets your personal information, he or she can make charges on your card, and you may be held responsible. How can you minimize the risk of someone stealing your information and using your card? Guard your information! Shred any papers (such as college application drafts) that have your Social Security number or other personal information. Do not share your personal identification number (PIN) and use random letters and numbers when you create your PIN. Liability Credit card fraud and debit card fraud do not carry the same risk. Credit card fraud carries much less liability than debit card fraud. If a thief steals your credit card numbers, by federal law the maximum that you are liable for is $50 if you report the fraudulent use. However, with a debit card if you do not notify the bank within 48 hours of a fraudulent use, you can be liable for up to $500. Even worse, if you do not notify your bank within 60 days, you are liable for the entire loss.

Short-Term and Long-Term Goals

Everyone has short-term goals that can be achieved in a relatively short period of time. They also have long-term goals, which can be achieved only after a longer time period. Now, look more closely at Isabella's situation. She receives an incomefrom her part-time job at a music store. Her short-term goals are to have enough money to pay for school supplies, meals with friends, and clothes. Relatively speaking, her short-term goals are not expensive; her weekly paychecks from the music store will easily cover her costs. Her long-term goal of buying a new guitar will be more challenging. At $950, the guitar is out of her short-term goal range; Isabella will need to commit to saving small amounts of money over a longer period of time before she can afford to buy it. For most people, long-term goals take thought, planning, and determination. Simply put, long-term goals, just like short-term goals, are a choice. The trick is for Isabella to choose the guitar over all her other spending options over and over again. She will need to resist any temptations to buy new jeans (and many other things) to save up enough for the guitar.

Evaluating Financial Institutions

Financial institutions include credit unions, commercial banks, finance corporations, savings and loan companies, as well as insuring agencies and non-bank institutions. Broadly speaking, there are three major types of financial institutions: Deposit-taking institutions that accept and manage deposits and that make loans—these include commercial banks, building societies, credit unions, trust companies, and mortgage lenders Insurance companies and pension funds Brokerage funds, underwriters, and investment funds There are costs associated with various services. These costs include but are not limited to the buying of checks for a checking account, fees charged when a savings account falls below a minimum balance, and fees charged for not having enough money in a checking account to cover a check, which is called "bouncing" a check or an "overdraft." For this module, you will focus on the similarities and differences between commercial banks and credit unions.

Simple Interest Calculation

Financial institutions pay you interest for depositing money in their savings accounts. With simple interest, if the bank pays 1% APY, 1% interest is multiplied by the principal each year—principal is the amount of money Isabella deposits. With simple interest, interest is paid only on the principal, not on any previous interest already earned. Here is an example of how to calculate simple interest using a deposit of $1,000 as the beginning principal—assuming that no additional money is deposited. (Recall that 1% is the same as 0.01. To calculate 1% of 1,000, multiply 0.01 by 1,000.) Year 1: 1% of $1,000.00 yields $10.00 interest; balance = $1,000.00 + $10.00 = $1,010.00Year 2: 1% of $1,000.00 yields $10.00 interest; balance = $1,010.00 + $10.00 = $1,020.00Year 3: 1% of $1,000.00 yields $10.00 interest; balance = $1,020.00 + $10.00 = $1,030.00Year 4: 1% of $1,000.00 yields $10.00 interest; balance = $1,030.00 + $10.00 = $1,040.00Year 5: 1% of $1,000.00 yields $10.00 interest; balance = $1,040.00 + $10.00 = $1,050.00 Isabella's first deposit is $50.00, so that is her beginning principal. Let's calculate how much simple interest Isabella will gain at 1% APY for five years if she does not deposit any additional money into her account. Year 1: 1% of $50.00 = $0.50 interest; balance = $50.00 + $0.50 = $50.50Year 2: 1% of $50.00 = $0.50 interest; balance = $50.50 + $0.50 = $51.00Year 3: 1% of $50.00 = $0.50 interest; balance = $51.00 + $0.50 = $51.50Year 4: 1% of $50.00 = $0.50 interest; balance = $51.50 + $0.50 = $52.00Year 5: 1% of $50.00 = $0.50 interest; balance = $52.00 + $0.50 = $52.50

Ways to Finance a Purchase

For example, few people could pay for college out of their savings—yet, most people know that a college education leads to greater job opportunities and more income over time. Almost no one can pay for a home just with the money in their pockets, but purchasing a home can provide you and your family with significant benefits, such as a stable living environment and a sense of community. In addition, the home's value may also increase, providing additional financial benefits. When you need a loan for a major purchase, you need financing. Let us look at different kinds of financing for small and large expenditures.

Insurance for Credit Unions

For federally-chartered credit unions, the National Credit Union Share Insurance Fund (NCUSIF), administered by the National Credit Union Administration, insures the deposits up to $250,000.1 State-chartered credit unions are also often insured by NCUSIF or by private insurance programs.2

Financial Institution Services

How do you know what to do with your money? Your first step is to learn more about what kinds of financial institutions provide services that help you make smart choices. Consumers who use financial institutions usually look for these kinds of services: Saving: a safe place to save money and to make money by earning interest Spending: an easy way to spend money through services like ATM cards, automatic payments, and checking accounts Borrowing: a place to borrow money for specific purposes, such as paying college tuition or buying a car Investing: a place to earn money over the long term by allowing other companies to use your money Financial institutions are intermediaries; they bring together people who want to borrow money with others who have money to lend. The lenders are willing to take risks in order to earn a return off of the borrowers. Many lenders are part of large financial markets. Types of financial markets include stock markets, bond markets, commodity markets, and foreign exchange markets. These markets may be real, physical places or they may only exist virtually. Regardless of the type, financial markets are always seeking financial transactions that increase the development of business but that also returns a profit to investors. Financial institutions also unite people who want to save money (borrowers) with those who are willing to invest (lenders, typically part of a financial market) the money to be saved. On each side of a financial transaction there are specific benefits and costs related to getting involved in financial markets: BenefitsCostsBorrowers . . .get the money they need for specific projects, such as paying for college or buying a car.have to pay to borrow money—through interest and other fees.Lenders . . .earn money by charging interest to borrowers.take a risk that borrowers will not repay their loans.Investors . . .earn money when the businesses they have invested in grow and increase in value.take risks because the businesses they have invested in can fail.

Rule of 72

How long would it take to double your money in a savings account? A formula can tell you how long it will take to double your money at compound interest. It assumes that you will put your money into an account with a fixed interest rate and leave it there. The formula is as follows: 72 ÷ (interest rate) = (number of years to double your money) This formula is called the Rule of 72. Suppose Isabella opens a savings account that earns 5% APY. 72 ÷ 5 = 14.4 years According to the Rule of 72, at 5% interest it will take her 14.4 years to double her money.Now, suppose the interest rate is 1%. 72 ÷ 1 = 72 years According to the Rule of 72, at 1% interest it will take her 72 years to double her money. You can see why it is important to get the highest APY possible for your savings account. There is quite a difference between 14.4 years and 72 years! You may wonder if the formula works in reverse—and it does. If you want to find out what interest rate you need to double your money in a certain number of years, the formula is 72 ÷ the number of years = the interest rate. If Isabella wants to double her money in six years' time, she will need an interest rate of 12%. If she wants to double it in 10 years, she will need a 7.2% interest rate. It is unlikely she will find these kinds of interest rates with a savings account, but other types of investments, such as money market accounts and stock portfolios, can yield higher rates of interest. You will learn more about these in Module 141.

E-Banking

How often do you interact with a teller at a bank or credit union? For many people, the answer is rarely. We live in an electronic age. Not only do we have smartphones, tablet, and computers, the financial world has electronic banking—known as e-banking. E-banking includes ATMs, debit cards, electronic check conversion, direct deposit, online banking, bill paying via a computer, and the wiring of funds.

Consequences of Debt

If you do not get a handle on paying down your debt, you will face many difficulties. Unpaid debt can lead to the following: Liens—Your property can be taken to pay off a debt, or you may not be allowed to sell the property until you have paid off the debt. Foreclosures—The bank that holds your mortgage can take back your house if the mortgage is not paid according to schedule. Repossessions—The seller can take goods back when the buyer fails to keep up with the payments. Evictions—The landlord can have renters removed from a house or apartment if they are unable to pay the rent. Finally, another consequence of debt can be wage garnishment. This occurs when your employer withholds money from your paycheck to pay someone to whom you owe money. It is a result of a lawsuit filed against you because you owe someone money. Wage garnishment may be assessed for taxes, child support, credit card debts, or defaulted student loans. Wage garnishments can have a negative impact on your credit rating, make it difficult to get a loan, and negatively affect your reputation.

Creating a Budget

If you have taken the time to identify your short-term and long-term goals and you know what your necessary expenses are, you are ready to build a budget. Governments and businesses typically work with annual budgets, which cover expenses for a year. They try to anticipate all of their expenses over a 12-month period and come up with one very large number. That amount of money is set aside to cover all anticipated expenses. For your local government, necessary expenses like salaries for school faculty and staff, building and road maintenance, and fire and police services are most likely the greatest expenses in the budget. In contrast, most households work with monthly budgets, which cover expenses for a month. Most personal expenses—such as phone, gas, electric, rent/mortgage, and credit cards—must be paid once a month. Most workers are paid every week or every two weeks. With a monthly budget, it is easier to make sure your monthly expenses do not exceed your monthly income. What should you include in a monthly budget? First, you should factor in all your necessary expenses: housing (including electricity and other utilities) basic food basic clothing Your necessary expenses also can include things that would be difficult for you to give up: transportation (car loan, gas, bus pass, parking) phone cable TV Internet access You also need to set aside money for savings. Your savings is for your long-term goals—like a car, a trip, college tuition, or a new computer. If you save a little each month, you can reach those long-term goals over time. Long-Term Goals: A Cruise Do not forget an emergency fund. This is the money you should set aside for unexpected expenses—for instance, if your car breaks down, you need to take an emergency trip, or you need to replace your computer. Setting up an emergency fund separate from your long-term savings fund may prevent you from going into debt in an emergency. If you are lucky, once you have accounted for all these items in your budget, you can set aside whatever is left over for your discretionary spending: eating out, going to the movies, or shopping for fun. Your discretionary spending may also include charitable giving.

Checking Accounts

If you plan to use your money frequently to cover your expenses, you will probably need a checking account. A checking account allows for many more withdrawals and deposits each month—this means your funds are very liquid. How do you get money out of your checking account? There are many ways: You can withdraw cash by visiting the bank in person and filling out a withdrawal slip for the amount you need. You can write a check with the date, the amount of money you would like to withdraw, and the name of the person who will be receiving the funds. The person receiving the check can present it to the bank in exchange for cash. You can receive a debit card to pay for items with money in your checking account without writing a check. Stores that allow you to pay by credit card typically will allow you to pay with a debit card, too. The difference is that, unlike a credit card, when you use a debit card, you are paying with money you know you have. You can use an ATM card. ATM stands for "automated teller machine." The magnetic strip on the back of the card stores information about your account; so, when you put the card in the ATM, you can conduct your transactions electronically. You can manage your account online. You cannot get cold, hard cash this way, but you can arrange for automatic payments for regular monthly expenses, such as a cell phone bill or a car payment. Use what you just learned to answer the following questions.

The World of the Unbanked

Imagine that Marie just got paid with a check, and she does not have a checking account. To cash it, she will need to go to a store that cashes checks and pay a fee. If her paycheck is $200, the fees could range from $3.00 to $5.00. This may not sound like a lot, but at $3.00 a week, she would be spending $156 a year just to cash her paycheck. If she had an account at a bank or a credit union, she would not have to pay to cash her check. In 10 years, without a bank or credit union account, Marie would lose $1,560 from her pay just for using check-cashing services. People like Marie who do not have a bank account are considered unbanked. Another term, underbanked, is assigned to people who do have checking or savings accounts but who still do a lot of business with check-cashing services and pawnshops. At these types of businesses, people can get money or payday loans that carry much higher interest rates than those charged by a bank or credit union.1 On top of charging interest on a loan, pawnshops can even charge storage fees for the collateral being held in exchange for the loan. As a student, it is to your advantage to open a savings and/or checking account at a bank or credit union. Then, you can deposit money, write checks, or even have your paycheck directly deposited into your account.

Other Electronic Services

In addition to the ATM and debit cards, electronic conversion, and Check 21, other electronic financial services include direct deposit, wiring of funds, and electronic bill paying. Direct deposit will be beneficial to Taylor. He can arrange with his employer to deposit his paycheck directly into his checking account. Some banks and credit unions offer no-fee checking accounts for customers who use direct deposits. If Taylor's relatives need money, he could wire the funds to their account. Usually, the financial institution will charge a fee for this service. Paying bills online is another convenience of electronic banking. For instance, Taylor does not need to write a check, pay for postage, or mail an envelope. He can set up electronic bill paying through his financial institution—there may or may not be a cost for this service.

Effective Debt Management

In the last few modules, you have learned about credit, debt, and how mismanagement of credit can lead to financial trouble. Avoid financial woes by saving money. Think about the money you spend. You can still enjoy life while saving money. When you get your first credit card, it may feel like you have "free" money. You may be tempted to buy things you do not need. These purchases add up quickly. The bill will arrive, you may not have the cash to pay for it. The best way to avoid financial troubles is to know your limits—by living within your means and not taking on too much debt. Yes, this often means doing without some things you really want now. You can always save up and buy later with cash. Though this strategy is not always possible, the techniques and information in this module will help you avoid financial trouble. It is hard work to get out of debt, so it is best not to get into it.

A Common Currency

In the late 20th century, some countries in the European Union (EU) joined together to adopt a shared currency: the euro (€). Like the dollar, the euro is divided into units of 100 cents (c). The coins—which come in denominations of 1c, 2c, 5c, 10c, 20c, 50c, 1€, and 2€—have a common side, which shows the denomination and a map, and a national side, which features an image that represents the country from where the coin was issued. Euros also come in bills in denominations of 5€, 10€, 20€, 50€, 100€, 200€, and 500€. The symbol for the euro (€) is inspired by the Greek letter epsilon—a tribute to ancient Greece, a foundation for Western civilization. The two horizontal dashes across the middle are meant to represent the currency's stability. When the euro was first introduced in 1999, 11 European countries adopted the currency. Today, it is the currency of 17 EU countries and is second only to the U.S. dollar in its use worldwide. Why use a shared currency? There were many compelling reasons for European countries to join forces economically. As individual countries, the small European nations did not have much influence, but with a common currency, the EU would have a greater impact on the world economy. The euro was intended to provide businesses in the "euro zone" with greater opportunities for collaboration and growth. And many governments believed that a common currency would offer greater economic stability and a stronger collective European identity. Throughout the 2000s, the euro zone has experienced significant growth due in great part to the strength and influence of the euro. But, recent economic events have also shown the dangers of a common currency: when some European countries—Ireland and Greece, in particular—were threatened with overwhelming debt, other EU countries such as Germany and France were faced with having to "bail out" their economic partners.

No Banking?

In today's world, it is possible to get by without a savings or checking account, but it is extremely difficult. Here are some consequences of not opening a bank account: Without a bank account, it is harder and more expensive to cash checks. Without a bank account, you do not always have a safe way to store and save your money. Without a bank account, it is much harder to pay your monthly bills—rent, phone, electricity, car payments, and so on. Many businesses require payments in the forms of checks or automatic payments, not cash. Opening a bank account is one way for a bank to get to know you as a potential customer. As a result, it is easier to get larger loans (say, for a car or a college loan) if you have established credit and have proven that you can manage an account responsibly. Without a bank account, you have no track record as a responsible money manager. Use what you just learned to answer the following questions.

Bank Services and Fees

Intro After weighing your options, you have decided that opening a bank account is the best way to go. Now is the time to become an educated consumer and choose the product—in this case, a particular type of bank account—that will work best for your needs. Types of Bank Accounts The two basic accounts that most banks offer are savings accounts and checking accounts. A savings account is for saving money: you can deposit (or put in money) or withdraw (or take out money). What is the benefit to parking your money in a savings account? Would it not be easier just to keep a stack of cash at home? One benefit is safety: with your money in a bank, it will not get lost or stolen—and, as you remember from Module 106, it is also insured by the Federal Deposit Insurance Corporation (FDIC). The other benefit of a savings account is that your money can make money by earning interest: this is the money that the bank pays to you as a "thank you" for letting it store your savings. It is important to remember that when you deposit your cash, it does not sit in a drawer waiting for you to come back. You are giving the bank permission to use that cash for other projects (such as providing loans to other customers) with the promise that funds equaling your deposits will always be available to you when you need them. Use what you just learned to answer the following questions. Types of Savings Accounts There are two types of savings accounts. A traditional savings account, or passbook account, is pretty straightforward. You deposit money, and it earns interest. Your money is available whenever you want it. The only problem is that interest rates on passbook savings accounts are quite low. Let's say you know you will not need to use your babysitting money for a while and would like for it to earn the maximum amount of interest. In this case, you could consider a money market account. Money market accounts require a greater minimum balance—the minimum amount of money you keep in the account—and they limit the number of transactions—deposits and withdrawals—you can do each month. But, in return, you receive a higher interest rate—your money earns more money. Use what you just learned to answer the following questions.

"Keeping Up with the Joneses"

Is "keeping up with the Joneses" really worth it? Trying to compete with everyone around you can get you into serious financial trouble. Riding around in that expensive SUV might be impressive, but status does not buy groceries. Conspicuous consumption can force consumers to borrow money through loans and credit cards. Excessive borrowing can lead to debt management problems. Conspicuous consumption is not a thing of the past. In California, during the 1980s, a trend developed for larger, more lavish homes. Because the houses were built quickly and had a generic design, people began comparing them to fast-food hamburgers. This is when the term "McMansions" was created.1 Despite this, many middle-class consumers bought the houses because there was a certain status in owning a larger home. Some owners came to regret their purchases when they realized how expensive it was to heat and cool these large homes.

Avoiding Fees and Maximizing Interest Revenue

Isabella wants to buy a new 12-string acoustic guitar. She goes to her favorite music store and learns how much it will cost. At this point, she does not have a savings account. She is trying to figure out what type of savings account to open and how long it will take to double her money. She is going to open her savings account with $50 and deposit $40 a month until she has $500.

Costs and Conditions Associated with Secured and Unsecured Loans

Isabella's rock band has a chance to play in Europe for the summer. The promoter will pay the band for performances and provide room and board, but each member has to pay the airfare to get to Europe. Isabella wants to get a secured loan to finance all the airfare, using the instruments as collateral. If she does not repay the loan, the lender can sell the instruments. Jessica tells Isabella that a secured loan is not a good idea and that she probably cannot get that kind of loan because she does not own a house or car. Jessica recommends an unsecured loan to finance the trip. Isabella is not sure she can get that kind of loan on her own. So, what makes one type of loan more desirable or possible than another? Let's look at some of the costs and conditions associated with both secured and unsecured loans.

Comparing Financial Institutions

It is important to realize that not all financial institutions are alike. Each has a variety of accounts and different features. The features generally center on the interest rate and how the interest is calculated, plus the fees. In general, interest is what the financial institution provides to you in return for depositing and leaving your money with it. The interest rate is stated as the Annual Percentage Yield, or APY. You should check out at least three financial institutions to determine which one provides the highest APY for its savings accounts. Higher APY rates generate more interest, allowing you to reach your financial goals more quickly.

Keeping Good Financial Records

It is worth repeating: the best form of debt management is not to get into debt. Learn to manage your finances before debt gets out of hand and begins to control you. An important part of debt management is maintaining accurate financial records. Keep track of your spending by logging your purchases in a notebook, on a mobile phone app, on a spreadsheet, or in any other way that is effective for you. Include snacks, movies, and other small purchases because these really can add up. It helps to organize your spending into categories, such as housing, utilities, insurance, food, entertainment, transportation, and education. Place each expenditure into a category. This will help you see where your money is going. Then, use this information to find places to reduce expenditures or modify your spending habits.

Maintaining Account Records

Jessica's problem is a common one—everybody needs to set up systems for managing their accounts and keeping track of their money and paperwork. You need a filing system, or a way to keep all your banking records in one place so your paperwork is organized and available when you need it. Remember, your relationship with the bank is a professional one. Banks expect their customers to check their account statements, keep track of their balances, and avoid overdrafts—that is, spending more money than they have in their account. As you get older, you will have even more records to track. You will have tax returns, insurance payments, possibly house and car payments, and so on. You will need to keep track of these so you can find important information about them—such as a receipt—when you need it.

Fraud Warning

Keeping an eye on your credit card expenses also means you are more likely to notice right away if someone is using your credit card fraudulently. If you notice a charge on your account that you did not make, contact your credit card company immediately. Let the credit card company know you suspect fraud. Not only will this help stop the fraudulent use, but alerting your credit card company will make it easier for you to prove you are not responsible for fraudulent charges. Many credit card companies have computer programs that track spending and alert them to spending that is out of your "usual" purchasing patterns. For example, if most of your spending typically is in the Richmond, Virginia, area and suddenly a charge is made in Italy, the credit card company might suspect fraud and deny additional charges in Italy. Shutting down your card from being used fraudulently in Italy would be a benefit. But, if you are on a trip to Italy, having your card denied also could be a major inconvenience. Always alert your credit card company when you are about to travel or make a large purchase outside your "usual" purchasing patterns.

Payday Loans

Let's compare the interest on a bank loan to the finance charge—or cost—of a loan you might get from a payday loan store. Imagine that you borrow $100 for a term of one year. At a bank, a typical interest rate for a personal loan might be 12%.1 At a payday loan store, a typical loan fee rate per $100 could be $17.50. The loan fee rate indicates the amount of fees that a person will have to pay on top of interest for the loan. When you factor the high fees associated with payday loans into interest, you can see how much a person has to repay a payday loan store for a loan. Unbelievably, a loan with a loan fee rate of $17.50 per $100 can lead to an Annual Percentage Rate (APR) of 227.5% or higher, depending on the length of the loan!2 And here is what your loan would cost: Loan AmountPayday Loan Store Finance Charge (APR 227.5%)Bank Interest (APR 6.56%)100$$500$$1000$$

A Brief History of American Banking

Let's go back to those individuals who first held on to large quantities of money for safekeeping—the bankers. By the time the United States was established in the late 18th century, banks around the world had already become pretty sophisticated. They did not just keep large quantities of money safe—bankers figured out pretty early on that they could do a lot with all of that money. What they could do was lend money and charge a fee, called interest. The money the bank earned from all of those interest payments would result in even more money the bank could lend, depending on the interest rate. Another thing the banks could do was invest money, or put their money into new projects, such as opening businesses. As these new businesses grew, the business owners who received the investment money would pay it back, along with a portion of the profits. This system provided another way for banks to make money—when the new businesses did well. If the investments failed, the bank most likely lost money. The First Bank of the United States was established in 1791. This was the first central bank of the United States. Alexander Hamilton, the then-Secretary of the Treasury who helped create the bank, argued that a national bank would serve three important roles: it would establish one consistent currency for the country; it could mint, or make, its own money; and it would establish credit for the country so it could borrow money from other nations.1 The bank's charter expired in 1811. The Second Bank of the United States was established in 1816 in part to help the United States get itself out of debt after the War of 1812.2 The themes of saving, spending, investing, and credit are closely linked with key events in American history. Let's take a look at some of the other most important moments in the history of banking in America.

Compound Interest Calculation

Like simple interest, compound interest is calculated on the beginning principal but also on any interest that has accumulated over time. Let's see the difference between simple interest and compound interest by looking at this example: Year 1: 1% of $1,000.00 yields $10.00 interest; balance = $1,000.00 + $10.00 = $1,010.00Year 2: 1% of $1,010.00 yields $10.10 interest; balance = $1,010.00 + $10.10 = $1,020.10Year 3: 1% of $1,020.10 yields $10.20 interest; balance = $1,020.10 + $10.20 = $1,030.30Year 4: 1% of $1,030.30 yields $10.30 interest; balance = $1,030.30 + $10.30 = $1,040.60Year 5: 1% of $1,040.60 yields $10.41 interest; balance = $1,040.60 + $10.41 = $1,051.01 As you can see, the first year is the same for simple interest and compound interest. The following years are different, however. The interest is not calculated solely on the beginning principal. Its calculation also involves money gained from interest in previous years. For a comparison, look at this table. It shows the result of leaving $1,000 principal at 8% interest for 10 years. The only difference is whether the interest is compounded and how often. Simple InterestCompounded AnnuallyCompounded QuarterlyCompounded MonthlyCompounded Daily$1,800.00$2,158.92$2,208.04$2,219.64$2,225.35 By comparing simple interest and compound interest for years two through five, Isabella realizes her money will grow faster if she picks the savings account with compound interest. She has also decided to deposit $40 per month into her savings account. Activity 108.3

Ways to Get Debt Under Control

Make payments on time: Now that you have planned a budget and prioritized your bills, it is important to make monthly payments on time to avoid interest, penalties, and fees. Sometimes, using money from a savings account to pay debt makes sense. The longer it takes to pay off debt, the more it ends up costing in interest and fees. Make payments early: When it comes to credit cards and loans, you might even consider paying your debts early. If your savings account earns low interest, use that money to pay off debt. If you eventually own a home, you can make extra payments on the principal of your mortgage. Even small payments can significantly reduce the amount of interest you pay over the life of the loan. Contact credit card companies: Ask if they can reduce your interest rate. They are making money from the interest you pay, so they might prefer to keep you as a customer. Transfer a credit card balance: You can transfer a credit card balance to another credit card that has a 0% (or low) interest rate. These promotional offers usually have time limits, so pay attention to the offer and follow the guidelines; otherwise, you could wind up paying penalties or a higher interest rate. However, if you do this too often, it could be a sign of credit trouble.Warning: Do not use a payday loan to pay off any debt. You can get payday loans from certain storefront businesses. They will loan you money for 30 days, but the fees and interest will be high. If you cannot pay the loan off in 30 days, more fees and interest will be added to the loan. It can be easy to get money from these types of businesses but very difficult to pay back the loan. Ensure against identity theft: Monitor your bank accounts, credit card accounts, and credit reports. Do not give your credit card to merchants and let them walk away with it. Always have your credit card in your sight. There are technologies where a thief can swipe your number and pass it along to someone else.

Increasing Your Credit Rating

Max got a credit card with a very low line of credit. At first, he was very careful to buy only what he could pay off in each month's bill. Over time, the credit card company increased his limit. Then, Max got sloppy. He stopped paying attention to how much he was buying with his credit card. Soon, he owed more than he could pay off in one month, and the interest began to accrue. Before he knew it, Max did not have enough money to make his monthly payment on time. Now, Max wants to buy a car. He applied for a car loan and was denied because of his low credit score. Credit ratings and credit scores are often mistakenly thought of as the same thing. The difference is that a credit rating is an assessment of creditworthiness, and a credit score is a number that comes from a formula that determines creditworthiness. Your credit score determines your credit rating. This number, sometimes called a FICO®(Fair Isaac Corporation) score, ranges from 300 to 850. A credit score is a way of rating your ability to pay your debts. It is like a grade for your past financial behavior. Your FICO® score is based largely on calculations in each of the following areas: Length of credit history Payment history Amount you owe New credit (including recently opened accounts) Types of credit A FICO® score of 700 or higher is a good credit score. A score of 600 or less would make it difficult to get a loan or even a credit card with reasonable terms. Depending on your credit score, you could see one of these two responses to your loan application. You, the consumer, are responsible for tracking your credit score. You are entitled by law to a free credit report every year. You can obtain a copy of your credit report by contacting Equifax, Experian, or TransUnion—the three companies that monitor credit ratings. You can also contact FICO® directly. While you may have seen numerous TV ads promising a free credit report online, AnnualCreditReport.com is the only source authorized by law to provide free annual credit reports.1 If you are just starting out, you will need to establish initial credit. This can be as simple as being approved for a credit card with a low line of credit. You can increase your chances of being approved by having someone with an established credit history cosign your application. Once you have established your initial credit, it is in your best interest to demonstrate responsible credit behavior by paying your outstanding balances or, at the very least, making your minimum payments on time during each billing cycle. You can avoid credit risk by paying outstanding balances before interest and other charges drive up the charges to an amount you cannot afford. When seeking out new sources of credit, borrow judiciously, and do not seek out more credit than you need. When acquiring new credit, you should vary your types of credit among the different sources of consumer credit you learned about in Module 115.

how far does interest add up?

Minimum payments cause maximum debt: Let's take a hypothetical credit card with an interest rate of 24% that requires you to pay off a minimum of 5% of your balance each month. In your first month with the card, you make a $1,000 purchase. You then decide to purchase nothing else and make the minimum payment every month. At the end of four years, you would have made $1,207.17 in payments to the credit card company; $473.39 of these payments would be for the interest, and you would still have a balance of $216.24. A year's worth of interest on balances: Let's use the same hypothetical credit card with an interest rate of 24%. This time, after the first month of overspending, you decide to spend only what you can afford to pay off at the end of the month. For the first month, you overspend $1,000, and your subsequent monthly purchases and payments are $100. At the end of the year, you will have purchased goods and services totaling $2,100 and made payments totaling $1,200. You will have paid $231.21 in interest and still owe a balance of $1,131.21. In both scenarios, the credit card user paid more for his or her purchases than the original purchase price of the goods. In the second scenario, the balances on the credit card grew every month. A credit card balance that grows every month affects the consumer in two major ways. First, it lowers the consumer's credit rating, which makes it harder to receive a loan. Second, and most important, credit card balances that continue to grow eventually balloon into amounts that cannot be repaid. When this happens, the consumer has to drastically change his or her lifestyle or declare bankruptcy.

Bank Statements

Now that Jessica's papers are under control, it is time for her to take a closer look at her bank statement. Simply put, a bank statement is a monthly record of what has happened with your bank account. Each action—a deposit, a withdrawal, a transfer, interest earned, or a fee—is a transaction.

Costs and Benefits Associated with Sources of Consumer Credit

Now that you know the terms and conditions associated with consumer credit, you also need to consider the costs and benefits associated with the different sources of consumer credit. Then, you will be able to choose wisely - and answer the questions that follow!

Comparing Credit Cards

Now that you understand about credit card terms and conditions, you are ready to compare cards. Your next step is to get the terms and conditions of several credit cards. There are many more cards than just those that come in the mail or that pop up as you surf the Web. If you search the Internet for "credit card," you will get hundreds of hits, most of which will be trying to sell you a particular card. A better way is to start with a nonprofit consumer organization, such as ConsumerReports.org. Sites like this help you compare credit cards objectively. Alternatively, you could search for a particular feature in a card—for example, "student card + no annual fee + cash back reward + credit card."

Why Reconcile?

Once Isabella gets her bank statement, she needs to make sure the records she keeps at home match the bank's records. Why is this important? There are a few good reasons.

Reconciling Your Bank Statements

Once Jessica gets her bank statement, she needs to make sure the records she keeps at home match the bank's records. Why is this important? There are a few good reasons: Make sure you are right. You want to make sure you have not made any serious errors in your records—you need to know how much money you have! Make sure the bank is right. Believe it or not, the bank sometimes makes mistakes. If you catch an error right away, you can talk with a teller or branch manager at the bank to fix it. Be on the alert for identity theft. Computer hackers are out there trying to steal and use your bank numbers. Check every transaction! How can she do this? She can use her check register. Throughout the month, she has been entering debits and credits into her check register and keeping track of the transactions she has made. Now, she can check them off against her bank statement. She may also find that she forgot to record a transaction in her register. For example, if she went to the movies and bought tickets with her ATM card, she might have forgotten to make an entry in the register. Her bank statement will remind her of that transaction, which she can then add to her register. She might also find that her bank statement contains transactions she did not authorize. In this case, she should contact her bank at once. Jessica's bank statement will also detail any fees charged to her account. For instance, if she ordered new checks, the fee for the checks will appear on her statement and have to be added to the register. Or, she may have neglected to record a fee that was charged for using an ATM from another bank. The process of matching your personal records to the bank's records is called reconciling. As an account holder, the reconciliation is your responsibility. This process is how you make sure that you—and the bank—are on track and that you know how much money you currently have. Here is how to start: Open and review your bank account statement as soon as your receive it. Look for transactions that appear on the statement but that do not appear on your register. If you forgot to add a transaction or fee to the register, do it now. Check off every transaction that appears in both the register and the bank account statement in the "reconciled" column. After every transaction is reconciled, your register balance should match your bank statement balance. On the previous screen, you saw that Jessica's ending balance was $855.51. You can see that her check register balance on 8/14 matches this, which means she and the bank agree on her balance—the account is reconciled. In the next module, you will learn what to do if the balances do not match up.

Ways to Reduce Loans

Once you take out a loan, you have to pay it back. With a secured loan, most of what you pay in the beginning is interest. Lenders want to be sure they make a profit, so only a portion goes to repaying the money you borrowed, called the principal. Instead of spreading the interest out over 30 years, for example, lenders collect most of it during the early years.

Opening Your Own Account

Opening an account is very straightforward. You first need to choose a bank. It is a good idea to find a nearby bank, so it is easy to do business. Ask friends, neighbors, and mentors for their recommendations. Research nearby banks online to find one that offers the services you need. Check that your bank has business hours that are convenient for you. You will need to fill out an application, which usually will ask you for basic information, including your date of birth, address, and Social Security number. Most banks require you to provide two forms of identification; you may bring your driver's license or learner's permit, your passport, your state-issued identification card, your military identification card, your certificate of citizenship or naturalization, as well as other forms of government-issued identification. Most banks also require their customers to be at least 18 years old, but some banks offer programs for individuals aged 16 to 18 with parental consent. Make sure to check out your local banks' guidelines on opening a checking account. Finally, you will need to complete a signature card. The bank will keep a card with your signature to prove your identity.

Weighing the Benefits of Banking

Perhaps the best choice seems obvious to you. But, before you make a final decision, it is important to weigh the costs and benefits of each option. As a smart consumer, it helps to think about the possible consequences of any action you take before moving forward. What are the benefits of getting paid in cash? The main benefit is that you will have immediate access to your money. But, consider the costs: the chances are greater that you will lose your money. And, if you are trying to save money, it might not be safe to keep all your savings in your room. What if you get paid by check? The money is certainly safer because only YOU are allowed to cash that check. However, if you do not have a bank account and need to cash your check at a check-cashing store, there will be a significant cost: the fees at those stores can be quite high. Your third option—opening a checking or savings account and depositing your checks there—may end up being the best choice. Banks provide a safe place to keep your money and offer relatively low fees for services like cashing checks. Another benefit is that you can arrange for direct deposit. This allows your employer to deposit your paycheck directly into your account, which gives you faster access to that money.

Credit Scores

Remember, a credit history tells all about a person's financial actions as it relates to any debts. All of this information is then used to assign a credit score—a number between 300 and 850. A person with a higher number is considered a better risk than a person with a lower number. The number is determined by a proprietary formula created by the Fair Isaac Corporation and is known as the FICO® score. Lenders use this number as a quick way to gain insight into a consumer's creditworthiness. Have you ever been in a department store and someone asks your parents or guardian if they want to save 10% on their purchase today? If they agree, they then fill out an application, and the merchant helps them apply for a credit card. It can take minutes to get an answer. Voila! Your parents or guardian can get a new credit card that quickly. Credit scores can go up or down depending upon what is going on in people's lives. This is a good thing because even if your score is low, you can improve it. The exact formula for a FICO® score is a secret, but the following is a general formula: FICO® score = payment history + outstanding debt + length of credit history + pursuit of new credit + types of credit in use

Credit Card Benefits

Rewards programs are just one benefit of credit cards that can make your financial life easier. Other benefits include the following: Online PaymentsWhen you buy something online, you can pay for it instantly with a credit card. When the time comes to pay your bill, some credit card companies offer secure Web sites so you can pay online. Deferred PaymentsWhen you use a credit card to make a purchase, the seller receives payment from the credit card company. Meanwhile, the credit card company is lending you the money until you can make the payment. You have the choice to either pay for the purchase in full when your credit card bill is due or pay the credit card company over time. Purchase ProtectionIf you make a purchase and the product is faulty or not what the seller led you to expect, and the seller will not refund your money, cards with purchase or fraud protection will refund the purchase amount you charged to your credit card. Fraud ProtectionCredit card companies tend to monitor the types and locations of purchases as another means of protection. For instance, suppose you normally use your credit card to buy clothes and food in Virginia, but, suddenly, your card is being used to buy a big screen TV in North Dakota. Credit card companies sometimes alert you about these types of suspicious activities. Establishing CreditWhen you use a credit card, you are creating a record of your spending and paying habits. If you pay your credit card bill on time and do not carry too large a balance compared to your income, your credit record will be good. Potential lenders will have access to this record to determine the likelihood of you paying them back if they loan you money.

Credit Card Rewards

Rewards programs can be one of the most popular credit card features. Did you know about 60 percent of consumers have a rewards program credit card?1 Rewards can include cash back for purchases, frequent flier miles, or awards of products. Remember, rewards are given only for purchases made. You cannot receive rewards on money you pay for fees or interest. When you are comparing credit cards, read the terms concerning rewards and ask the following questions: How many reward points are given for each dollar purchased? Is there a bonus award when you are first issued the card, and if so, how much do you have to charge to get the bonus award? Do the reward points or bonus award points expire?

Activities That Establish Your Credit Rating

Sometimes, your need for money or goods does not sync up perfectly with the amount of cash you have on hand. This is just one of the reasons why people use credit cards. Credit cards also are very useful for buying items online or from organizations that do not accept checks. To get a credit card, you must build a credit history—this is also known as your character. In terms of borrowing money, character is the borrower's history of paying bills. You may wonder how you can build character if you have never received a loan. Actually, it is quite simple. Begin by taking out a loan that is easy to get and easy to repay. Here are some examples: Apply for a retail store credit card—many retail stores give out credit cards with relatively low limits. You can then use this card to purchase something you have already saved for. Then, pay off the charge quickly. Ask a parent or another person with an established credit history to cosign a loan application or credit card application. By cosigning, that person agrees to pay the bills if you default. You can establish character by paying your monthly bills on time. Get a debit card and use it wisely. Make sure you do not overdraw the account. Finance a larger purchase, such as a piece of exercise or entertainment equipment, through in-store financing. Take out a small loan from the bank where you have an account. In all of these examples, it is extremely important to pay the monthly payments on time. You can also establish capacity, or the ability to repay a loan. To do this, you must develop capital, which refers to savings and other assets. You can develop capital by increasing your cash reserves in a savings account, money market account, or certificate of deposit. This shows that you have capital to back up your promise to repay a loan. Finally, you should document your collateral—the valuable assets you own—which you could sell to pay off a debt. Suppose Christopher wants a new video camera so he can post his photojournalism portfolio online. He also plans to show samples of his work in college applications. He has a job taking pictures for the local paper and knows he can save up for the camera. But, he also wants to establish credit. In addition, credit card records could help him keep track of his job-related expenses. Christopher decides to keep his money in the bank and to apply for a student credit card from that bank. Christopher is 18, so the bank approves his application without a cosignature from his grandmother. He uses his new credit card to buy the camera. When the bill arrives the following month, he pays it off with his savings. Now, he has credit and a video camera. Not only will the video camera help him with his business, he can also use the camera as collateral for future loans. If Christopher continues to build his savings, he will establish a strong credit rating due to character, capital, and collateral.

Know the Signs of Financial Trouble

Suppose you have created a monthly budget, but you cannot stick with it. There just is not enough money to pay all your debts. Here are some warning signs of serious credit trouble: You feel overwhelmed by your bills. You pay bills late and receive late fees and penalties, or your interest rate has increased. The utility companies are threatening to shut off your electricity, water, or gas service. The oil company will not deliver home heating oil until you pay off your balance. You are able to pay only the minimum payment due on credit cards. You use one credit card to pay the balance on another credit card. You reach your credit limit on credit cards. You apply for new credit cards to pay off old credit cards. You are worried about losing your good credit rating. You fear losing your house because you cannot make your mortgage payment. You receive annoying calls from collection agencies. You receive late notices in the mail from creditors or collection agencies.

How Do Countries Exchange Currencies Today?

Suppose you want to travel to Mexico. You will need to use your U.S. dollars to purchase Mexican pesos. How do countries determine the exchange rate or foreign-exchange rate—how much you can convert one country's currency for another's? Many factors play into the exchange rate—for example, how other countries perceive another country's political and economic stability. If a country has a stable government, its people have steady work, its debt level is low, and there is a brisk level of trade, its currency may be considered strong, which makes it more valuable. To the contrary, a country with a lot of political and economic turmoil will tend to have a weaker currency, which makes it less valuable. Use the interactive graph below to explore what happens to exchange rates when the value of a particular country's currency rises and falls. Hover over the points to see the exchange rates for each of the different dates below.

Consumer Protection Laws

The Bureau of Consumer Protection, which is supported by the Federal Trade Commission, is the consumer protection agency for the United States. Its goal is to protect consumers from unfair business practices, deception, and fraud. Specific federal laws help consumers steer clear of deceptive practices related to their credit and debt. Knowing these laws can help protect you from being treated unfairly. If you are not satisfied, walk away. Your credit rating is too important.

When Is a Check Not a Check?

The Check Clearing Act for the 21st Century, also known as the Check 21 Act1, is a federal law that improved the efficiency of handling electronic checks. Prior to this act, checks had to be moved physically from one place to another. As a result of the act, an electronic conversion can now be made. This means the checks do not have to be moved physically from one place to another to be processed. It is possible for electronic payments to be made directly from your account, which is much easier than writing out a check. But, you need to know the difference between an electronic check conversion and actually using a check to make a payment. You also need to know your rights when using electronic check conversion transactions. When Taylor pays by check, the check number, the account number, and the bank's routing number will be used in an electronic payment. A store needs this information to take money from Taylor's checking account. That money will then be transferred to the store's bank account. Taylor needs to realize that when his check has been electronically converted, he must have money in his checking account to cover the check. In addition, the electronic transaction may process faster than the check. Even when a check is mailed directly to a company in order to pay a bill, companies tend to use electronic check conversion processes. Why would businesses do this? Not only do they get their money faster, there are less errors in processing (because the checks are converted electronically) and it also minimizes fraudulent transactions. Again, it is very important to make sure that you have money in the bank to cover this mailed check because it may process quicker than you might think.

The Equal Credit Opportunity Act

The Equal Credit Opportunity Act (ECOA)1 prohibits discrimination against individuals and businesses applying for credit with banks, loan and finance companies, retail merchants, credit card companies, and credit unions. They cannot discriminate based on the following criteria: Sex Race Marital status Religion National origin Age Receipt of public assistance—this needs to be considered the same as income A lender may ask some of this information in the application but cannot use it against the applicant to deny credit. If individuals or businesses are denied credit, they have a right to know why. If the lender used a credit bureau to obtain information about the applicant, the lender must inform the consumer which credit bureau was contacted. After being denied, a consumer is entitled to a free copy of his or her credit report from this credit bureau. After you apply for a loan or credit card, the lender has 30 days to inform you if your application has been accepted or denied. If denied, you have the right to know why. You will be notified in writing, and there should be instructions on how to get more information about this decision. You may have to submit your request in writing, or you may be able to call to find out the reason(s). Under the law, you have 60 days to request additional information about why you were rejected. Do not delay with the follow-up if you feel you were unjustly denied. You also have the option to appeal a decision. Many times, credit cards are denied by a computer system that "red flags" certain credit limitations. Sometimes, by speaking with a person, you can explain why you think you should be approved. Offering additional information, such as explaining that you are close to getting a promotion or a raise at work, can help. Appealing a credit card denial does not appear on your credit report. If the credit denial is final, all you can do is work to improve your credit rating. Do not react to the denial by applying for too many credit cards because this will show up on your credit report. Wait for a period of time—anywhere from six months to two years—and check your credit history before applying for a credit card again.

Why Should I Get My Credit Report?

The Fair Credit Reporting Act (FCRA) of 1971 states that consumers must be allowed to access the information in their credit reports. The act also allows consumers to correct errors. Reading your credit report can be pleasantly surprising or shocking. You might have been doing everything right or you might need to make some improvements. Forget about feeling bad or embarrassed. If you need to improve your credit rating, it is best to face your mistakes head on. Make sure to get a report from all three credit bureaus. They will differ slightly because they do not always get the same information from lenders and merchants. Another important reason to review your credit reports is that it often is the first place where people detect identity theft. When looking at a report, you may see accounts or activities that do not look legitimate. Or, you might even see that someone else has tried to open a credit card account with your name and Social Security number. By regularly monitoring your credit history, you can reduce any damage from credit fraud. Looking at the credit report from each of the three credit bureaus will give you a complete picture of what a lender would see. Put yourself in a lender's shoes and see if you think you are a good credit risk. The Fair and Accurate Credit Transactions Act of 2003 makes it possible for consumers to get a free credit report from each of the credit bureaus once a year. You cannot get a free credit score, but you can get one for under $10 from any of the three credit bureaus. To get a copy of your free credit report, you can do one of the following: Go to this Web site, which was created by the three credit bureaus: www.annualcreditreport.com (Links to an external site.). Many other Web sites promote "free" in their names, but will charge you for your credit report. These sites may also offer a monthly credit report for a fee, which is not necessary. Do not ever provide your credit card number for a free product. Call this toll-free number to get your free credit report: 877-322-8228. Write a request that includes your name, address, Social Security number, and date of birth. If you have moved in the last two years, also provide your previous address. Mail your request to this address: Annual Credit Report Request ServicePost Office Box 105281Atlanta, GA 30348-5281

The Fair Debt Collection Practices Act (FDCPA)

The Fair Debt Collection Practices Act (FDCPA) was signed into law in 1977.2 It protects U.S. citizens from abusive debt collection practices. The FDCPA also protects legitimate debt collectors so that they are not hurt by collectors who engage in abusive practices. Debt collectors must take care to avoid violations of this law. Here are some specific restrictions the FDCPA places on debt collectors: They cannot threaten to use violence or other physical acts to harm a consumer's physical body, reputation, or property. They cannot use obscene or profane language. They cannot publish a list of consumers who allegedly have not paid debts and share this list with others, except with a consumer-reporting agency. They cannot repeatedly or continuously call a consumer by phone to annoy, abuse, or harass him or her. They can call consumers only between the hours of 8 a.m. and 9 p.m. They cannot claim to be someone they are not by using a false, deceptive, or misleading identity to collect a debt. If they contact someone else in an effort to locate a consumer, or leave a message with someone else, they must identify themselves. However, they cannot reveal that they are calling because the consumer owes money and they are trying to collect a debt. They cannot go to a consumer's place of employment unless the employer agrees. They cannot contact a consumer anymore if the consumer submits a written request to stop contacting him or her. To learn more about debt collection, visit the Federal Trade Commission online at www.ftc.gov/moneymatters (Links to an external site.). Here you can learn more about debt, credit cards, money management, scams, debt relief services, and other topics that help protect you and your money. If you think a debt collector has treated you unfairly, you can file a complaint with the Federal Trade Commission at www.ftccomplaintassistant.gov/ (Links to an external site.)or call 877-382-4357. 1 "Equal Credit Opportunity Act." fdic.gov. Federal Deposit Insurance Corporation, 3 Dec. 2009. Web. 23 Nov. 2011. 2 "Fair Debt Collection Practices Act." fdic.gov. Federal Deposit Insurance Corporation, 3 Dec. 2009. Web. 23 Nov. 2011.

Time Value of Money

The concept of time value of money is important for savers. The longer money is saved, the more its value can increase over time. You saw how Isabella's savings grew. With a higher interest rate and a longer period of time in a savings account, the value of her principal would have grown even more. Imagine the x-axis is time and the y-axis is the amount of savings. The greater the time, the greater the amount of savings! What if you received $100 today and invested it immediately in a 12-month certificate of deposit that pays 6% interest? One year from today, it would be worth $106. But, what if you did not receive that $100 until one year from today? Then, one year from today, you would have only $100, as opposed to $106. In other words, that $100 would be worth more today than it would be in the future. Time value of money means that if money can earn more money, it is better to have it now rather than at a later date.

Calculating Credit Scores

The credit bureaus use the information in your credit report to calculate the score. Each credit bureau uses a different version of the FICO® formula to calculate your credit score. As a result, each bureau likely will produce a different score. The pie chart below shows a general breakdown of the data used to calculate credit scores. Your credit score carries a lot of weight when it comes to being approved for a loan or credit. Higher scores make it easier to get approved for loans or credit cards and allow you to get lower interest rates. Source: "Credit Reports & Scores." cccsmt.org. Consumer Credit Counseling Service, n.d. Web. 4 Dec. 2011. When a credit report is good, the credit score will be high. The best way to establish a good credit rating is to pay all your bills on time. This particular behavior has the biggest impact on establishing and keeping a good credit rating. It is also advisable to generate enough income to cover your debt. As a general rule, it is important to keep your debt-to-income ratio at about 25%. This means that if you earn $100,000 a year, your annual debt should not be above $25,000.

Our Money Today

The money in your pocket today is a direct descendant of those early forms of money, with one very important difference. Early forms of money were known as commodity money, which has intrinsic value. For example, if a coin is made of a precious metal, it is known as commodity money, and its "intrinsic value" is what that metal is worth.1 In other words, commodity money is worth something in its own right rather than simply symbolizing a particular financial value. Throughout history, most money was commodity money. Take a look at the coins and bills in your pocket. The coins may be shiny, but they are not commodity money. If you melt them down, the small amount of metal in them would actually be worth less than the coins themselves . . . and the currency is just paper, which has virtually no intrinsic value. This is because we now use fiat money, which is derived from the Latin fiat—meaning "let it be done." This money has value only because the government says it does. Fiat money has no intrinsic value in itself; instead, it has value because a government backs it and declares that it has a specific value.2 Unlike the early bank notes, today's currency cannot be traded in for actual gold or other precious metals. The United States used to issue gold and silver certificates—paper money that could be exchanged for gold or silver coins. The government stopped issuing gold certificates in 1933 and silver certificates in 1964. Today, the United States issues only Federal Reserve Notes, a fiat currency. Starting with England in 1821, each national government gradually began backing their fiat money with the country's gold reserves. This system, known as the gold standard, meant that governments linked the value of their currency to the value of a specific amount of gold they held. Today, no countries remain on the gold standard—the United States abandoned this system in 1971.3 In our modern society, money makes the world go round. Financial markets, marketplaces that participate in trading of assests like bonds, currencies, and derivatives, bring people together who have money to lend. These financial markets are willing to take risks in order to earn a return off of the borrowers. Does this type of financial organization sound familiar? It should! The New York Stock Exchange (NYSE) is an enormous financial market that trades trillions of dollars each day! Financial institutions differ from financial markets by acting as intermediaries between borrowers and financial markets in order to facilitate such financial market interactions. Some financial institutions include banks, credit unions, insurance companies, and investment institutions. You will learn more about financial markets and financial institutions in upcoming modules.

Filing Chapter 7 or Chapter 13 Bankruptcy

The most common types of bankruptcies are Chapter 7 and Chapter 13. Both help the filer shed unsecured debts such as credit card balances. They also stop foreclosures, repossessions, wage garnishments, debt collection activities, and utility shutoffs.1 The filer is still responsible for child support, taxes, alimony, fines, and some student loans. Filing for bankruptcy is a serious decision. It should be made cautiously and be the last resort for only the most serious financial troubles. Anyone considering bankruptcy should consult an attorney. Bankruptcy stays on your credit report for 10 years and makes it difficult to get a loan, a credit card, a job, or even life insurance. People who file bankruptcy may eventually receive a discharge—a court order that permits people not to repay some of their debts. This decision is up to a bankruptcy judge. Congress enacted the federal bankruptcy laws in 1933.2 After hearing a case about these laws, the U.S. Supreme Court determined the following: It gives debtors a financial "fresh start" from burdensome debts. It gives to the honest, but unfortunate debtor, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.

Bricks-and-Mortar Banks or Credit Unions

The term "bricks-and-mortar" refers to an actual building—or, in the context of this module, an actual, physical bank or credit union location. Getting to know the people who work at a bank or credit union is one of the benefits of bricks-and-mortar establishments. On the other hand, if the bank is not open, a customer cannot talk directly to a teller to get information, and may feel uncomfortable using the electronic services.

FDIC Insurance

The term FDIC stands for the Federal Deposit Insurance Corporation. It was started in 1933 to protect bank deposits.1 There is an insurance limit of $250,000 per depositor per insured bank. 2 The FDIC provides protection only for checkings and savings account deposits. It does not cover investments like stocks or bonds or some other banking services like safe deposit boxes. If a bank fails, a depositor's funds (up to the coverage amount) will be transferred to another FDIC-insured bank. This helps protect deposits from loss. Now use what you just learned to answer the following questions.

Financial Institutions

There are many kinds of financial institutions that provide various financial products and services. Let's take a closer look. To start, there are three kinds of institutions that offer the most essential services that most consumers need. Each of these institutions has distinct features and functions. Click on each tab to learn more. Protecting Against Risk All three types of institutions share one very important trait: customers who deposit their money are protected against some risk (up to a certain dollar amount). That means that if the institution fails, another organization will replace some of the deposited money that was lost. The Federal Deposit Insurance Corporation (FDIC) insures banks and savings and loan companies. Deposits made at credit unions are insured by the National Credit Union Administration (NCUA). All accounts are insured for up to $250,000 per depositor per bank.

Causes and Consequences of Bankruptcy

There are many reasons why consumers get into financial trouble and contemplate filing for bankruptcy. Here are some of the most common causes: An individual may have high medical bills but lacks adequate health insurance to cover a long-term chronic illness or a serious injury. The consumer has a problem with excessive spending, impulse buying, or emotional spending. For example, when they are happy, they may shop to celebrate; when they are sad or depressed, they may shop to feel better. Some consumers have poor money management skills—typically because they do not have emergency savings or a monthly budget. The consumer loses his or her job and has no savings to cover their debts. The individual has a small business and uses his or her personal credit cards, equity in the home, or small business loans to finance the business. If the business fails, the individual's personal credit is also affected. No matter the cause, the consequences of bankruptcy are real and painful. One should consult an attorney before any decision is made. Also, it is wise to take all steps to work out a repayment plan with creditors before filing for bankruptcy. Consequences of Filing for Bankruptcy Your credit rating is affected negatively and the bankruptcy stays on your credit report for 10 years. It is difficult to get unsecured credit for two years; if you can get it, the interest rates will be high. It is difficult to get a home mortgage or loan for two years. Certain professions frown upon hiring employees who have filed for bankruptcy in the past. If you are a banker, accountant, or other professional in the financial industry, your employer may have doubts about your ability to perform your job.

Expenditures That May Require a Loan

Think about the expenses you and your family have. Each month, you probably pay bills for electricity, food, water, sewer services, cable television, Internet access, and phone service. You may also pay for lessons such as music, dance, or sports. Your family also pays expenses that may be billed once, twice, or four times a year. These could include life, car, or medical insurance premiums, as well as tax bills. In addition, subscriptions to magazines and memberships, such as health clubs and neighborhood pools, may be paid annually or once a year. Some planned expenditures, such as college tuition or house and car payments, can last for a specified length of time. The frequency of the payments can vary—weekly, monthly, quarterly, or annually. Not all of your family's expenses, however, are predictable. Health care emergencies, repairs to a house or a car, a job loss, or other issues can arise unexpectedly. It is the consumer's responsibility to budget for both planned and unplanned expenses. Saving even a small amount every pay period can help people handle unexpected expenses without going into too much debt.

Correcting Credit Rating Errors

Think back to Max's actions at the beginning of the module. Suppose Max had been behaving responsibly all along—but was still denied a car loan. What should Max do? Max should first ask the bank, or car loan officer, why he was denied. Max learns that he has a low credit rating, so he should call one of the three credit rating companies—Experian, TransUnion, or Equifax—and ask to see a copy of his credit report. Max calls one of the agencies and receives his report. It shows he had a number of late payments, which confuses Max. He has been making his payments on time, and his billing statements prove it. He sends copies of his credit card records to the address indicated and proves his low rating is a mistake. After notifying the agency in writing of the mistake and asking it to correct the error, Max will have to wait up to three months before he regains a clean credit report. While developing your credit rating, be savvy about how credit is evaluated. Establish long-term accounts to demonstrate stability. However, if you open a number of accounts in a short time, it can hurt your credit score. Keep the number of loans and credit cards to a minimum. One credit card is enough to establish a credit history. Avoid late payments. If you know you are going to be late, contact your creditor by phone, wait to speak to a customer service representative, and then, clearly and briefly explain that your payment will be late. Specify a date when the creditor can expect to receive your payment, and ask the person to make a note of the call. Then, mail the payment by the renegotiated date. More than 30 days late is a serious problem. If you pay less than 30 days late, you may not be penalized. Do not "max out" your credit cards by spending up to your credit limit. Keep your billing statements so that you have a record of making your payments on time. Seek out and correct errors in your credit report to keep your credit history clean. If you discover errors, notify the credit-reporting agency in writing and with supporting documents (make copies—do not send originals). The credit-reporting company then must investigate the issue and correct the error.

Compiling Credit Reports

TransUnion, Experian, and Equifax are the three main credit bureaus, or credit reporting agencies (CRAs), that collect information about you. Credit bureaus collect information in several ways. For example, you go into a store and fill out an application for a store credit card: 1. The store then shares the information on your application with the credit bureau. Now, the bureau has up-to-date details about you. The credit bureau keeps the application information in a database. The next time you apply for a loan or a credit card, that information is included in your report. Each time a merchant, a credit card company, a lender, or another business accesses your personal data, they pay the credit bureau a fee. 2. The store approves your application and gives you a store credit card. Whenever you make purchases and payments using this card, that information is provided to the credit bureaus. Most lenders and merchants provide the credit bureaus with information about spending and repaying behavior. This is done on a regular basis. Each bureau compiles it and sells the information to the decision makers who make judgments about consumers' creditworthiness. Sometimes, data is reported to just one credit bureau. This is why each credit report can be slightly different. Larger merchants, however, report the information to all three credit bureaus. The credit bureaus collect public information as well. This includes records about liens, bankruptcies, lawsuits, and foreclosures.

Conspicuous Consumption and Social Class

Veblen's original theory of conspicuous consumption was developed at a time of economic expansion, when a class of people known as the nouveau riche, or "new rich," had emerged in society. Through work and business ventures, this group had attained wealth and joined the aristocrats as members of the society's wealthy upper class. However, in contrast to the nouveau riche, aristocrats typically had inherited their money and land from their ancestors. They were called old moneyand had the most prestige in society. Other social classes included the bourgeoisie—the middle class—who usually owned property and were professionals, businesspeople, and merchants. Though they were not rich, they were financially comfortable. Below the middle class was the working class. They typically worked in manual or industrial jobs in factories owned by the bourgeoisie, or as servants to the wealthy. Conspicuous consumption highlighted the dividing line between these classes. The aristocrats had the means to afford the most luxuries and enjoyed the most prestige. The nouveau riche hoped to gain the same elevated status by imitating the aristocrats through lavish spending. The same was true lower down the social ladder. The bourgeoisie desired the wealth and status of the upper class and the working class wanted what the bourgeoisie had. The attempt to appear as wealthy as others became known as "keeping up with the Joneses."

Voluntary and Involuntary Bankruptcy

Voluntary bankruptcy occurs when debtors file a bankruptcy petition because they have more debts than assets and believe they cannot pay their debts. Involuntary bankruptcy occurs when creditors file petitions of bankruptcy against debtors who owe them money. There are pros and cons to involuntary bankruptcy. A creditor needs to proceed cautiously before taking legal action to force a debtor into bankruptcy. Here are the key points to understand about involuntary bankruptcy: A creditor can file a petition of involuntary bankruptcy against a debtor only under Chapter 7 or Chapter 11 of the Bankruptcy Code. The exceptions are if the individual is a farmer, a family farm, or a corporation that is not a commercial corporation. Creditors must meet certain requirements. One requirement is that the debtor must have 12 or more creditors who are owed money and, through at least 3 of these 12 creditors owed, have a total debt over $13,475. At least 3 creditors typically file a petition; the more creditors that file a petition, the likelier the creditors will receive their owed money. However, if a debtor has fewer than 12 creditors who are owed money, and has a total debt over $13,475, then just 1 creditor can file a petition. Single creditor petitions are very rare because they are risky and do not usually result in the creditor receiving money. Once the petition is filed, a debtor has 20 days to respond. He or she can dispute the claim, and the creditor(s) must prove the debtor consistently does not pay bills on time. The court decides what comes next. If the court dismisses the petition, the case will not proceed, and the creditor may be forced to pay the debtor's court and legal fees. If the creditor's petition is accepted, the court enters an order of relief, and the case proceeds under Chapter 7 or Chapter 11 bankruptcy. There is a period of time called the "gap period," which begins when the creditor files the petition and the court makes its decision. During this gap, the debtor can operate a business but cannot sell business assets, unless it is a necessary and usual part of normal business operations. Creditors might even have to offer credit to the debtor during this gap period. The debtor does have a chance to rehabilitate his or her business during this gap period. This would benefit all involved—the debtor gets the business back on its feet and is able to repay creditors.

Freedom from Conspicuous Consumption

Warren Buffett has never worried about "keeping up with the Joneses."1 He is one of the wealthiest businesspeople in the world and is a leading investor in the stock market. He is a generous philanthropist who donates to many charities, but he is also frugal. He still lives in the same five-bedroom stucco home he bought in 1957 for a little more than $30,000. He does own a home in California and a private jet; but, for all his wealth, he has never been known to buy for the sake of showing off. He is the chairman and CEO of Berkshire Hathaway, and his net worth is approximately $40 billion. He and Bill Gates, the founder of Microsoft, are good friends and play bridge together. Buffett has made a major donation to the Bill and Melinda Gates Foundation and has been very generous with other philanthropic causes. We live in a society where wealth and possessions are often celebrated as the highest achievement. There is a constant barrage of advertising that urges us to buy, buy, buy! Often, the underlying message is that we must make one more purchase to be "good enough." So, it is not surprising that many people dream of owning a big house, an expensive car, a nice outfit, or fancy jewelry just to impress others. It is human nature to want to be admired by others, and it is not easy to withstand the messages of the culture. That is why it is important to remember the pitfalls of conspicuous consumption, to stay grounded, and to focus on the things with true value, such as family, education, and personal achievements. When you recognize these genuinely important aspects in your life, you will realize that truly wealthy people care about others as well as themselves. The only person you have to keep up with is yourself.

Credit Strategies

When considering a credit card expenditure, predetermine the definition of a true emergency (for example, something that enables you to do your job or pay your bills). When considering a nonemergency purchase, spend only what you can pay off in the next month. For especially large purchases, save up the down payment and charge as small an amount as possible. When considering if you can make payments on a large item, such as a car, keep your credit rating in mind. Make sure that you possess the income to afford the payments. Do not bet on a raise or a big lottery win. Look at your expenses and income and be reasonable about what you can afford to pay.

Have to . . . or Want to?

When you put together a budget, you also need to make a distinction between what "I have to do" (the items you have to spend your money on) and what "I want to do" (the items you want to spend your money on). Items that you want but that are not necessary for your day-to-day survival are considered discretionary expenditures. This type of spending is for goods and services beyond the essentials of food, shelter, and clothing. When you are an adult, there are many necessary expenses, such as medical care, various insurances, rent or mortgage payments, basic food, and clothing. Whatever money you have not spent on necessities can go to discretionary expenditures, such as vacations, eating out, or new technology (a TV or computer). Vacations, especially to destinations in another country, are long-term goals, requiring many months of planning and saving. For high school students like Isabella, the picture is a little different. Her parents provide her meals and her job at the music store is close enough for her to walk to. Because she has no car or meal expenses while she is at work, everything else, including music supplies and fun with friends, is discretionary. Sometimes, the line between "need" and "want" is a little fuzzy . . . and that is where you really have to pay attention. Isabella, for example, has agreed to buy her own clothes. If she needs a pair of jeans, should she buy the most fashionable pair even though the price will blast an enormous hole in her budget? This is where the "discretionary" part comes in. If she makes smart choices, she will be able to save more money for her new guitar and buy a pair of jeans she can afford. To do this, Isabella must ask herself: what does she want more—new jeans or the guitar? Can she be happy with a less expensive pair of jeans? Can she wait an extra week or month? Understanding what we are giving up to get what we really want helps us make better choices. The thing we give up, which is often the most tempting, is our opportunity cost. If Isabella spends money on a pair of jeans, no matter what they cost, she cannot save that money for her guitar. If she chooses to buy the jeans, her opportunity cost is the money for her guitar. By saving the money, her opportunity cost becomes her new jeans—the item she would have bought. Depending on her decision, either buying the jeans or saving the money for the guitar, she can determine which is more valuable to her. Identifying your opportunity cost when making a choice can help you assess the value of your choices. Remember, there are no wrong answers—just choices, opportunity costs, and consequences!

How to Correct Errors

Why is it so important to review your credit reports? Suppose you need a car loan. You might be denied credit because of errors in your report. It does not take much effort to correct these errors, but first, you have to know they exist. Once you get your credit report, read it carefully. If you detect any errors, contact the credit bureau in writing. The credit report itself will have specific directions on how to correct errors. Be sure to follow these. Usually, you will need to provide supporting documents to prove that an error was made. The credit bureau will investigate your request and correct any errors. Remember, credit reporting agencies can make mistakes when they record transactions. It is important to keep track of how others are keeping track of you.

Factors That Affect Your Credit Rating

Would you want to lend money to Max's brother? Would you trust his brother in other ways? After all, he is not repaying his loan to Max. He is not keeping his word or behaving in a way that makes him creditworthy or trustworthy. Remember, credit is a risky business. When lenders give you a loan, they trust you to repay the money. It makes sense, then, that lenders lend money only to those individuals or businesses that are most likely to pay them back. This type of borrower is known as a "good" credit risk. You can see why a bank would want to know about a person's credit history. What about an employer or a landlord? They, too, want to know if you are trustworthy. The way you manage your money says a lot about you, and your past actions have consequences that affect your future. It is important to have a good credit rating because it will be easier for you to buy a home, purchase a car, make home improvements, get an education, find a better job, or receive better insurance rates.

How to Make the Best Decision

You have read a lot of information about methods for financing a purchase and sources of financing and types of credit. How do you know which options are best for you? One way to sift through the information is to use a decision model. Explore the steps below, then answer the questions that follow.

Good Debt versus Bad Debt

You know that people borrow money because they do not have enough to pay for something they want or need. But when is it a good idea to borrow? When is it a better idea to choose a less expensive option—or simply decide not to make a purchase at all? When you borrow, your aim should be to have "good debt." Think of good debt as an investment. Investments are supposed to increase in value over the long term. So, going into debt to buy a home, to finance a small business, or to pay for a college education may lead to improved options in your life. For instance, going into debt to improve your education is an investment in your human capital—when you increase your skills, you become more attractive to employers and create more job opportunities, which could earn you a higher salary. Long after you pay off the loan for your education, you will still possess those skills and possibly be making a higher salary than if you had not invested in your education; this is why borrowing money to pay for higher education is considered a good debt. Think of bad debt as debt incurred to buy something that will be consumed quickly and lose value over time. Examples include a meal in a fancy restaurant, tickets to a concert, a vacation, or an expensive prom dress that you will wear only once. Almost all consumable items decrease in value and eventually become worthless; these include clothing and technology—the types of items you probably enjoy owning and plan to buy more of in the future. However, these might not be the types of items you borrow to buy. Remember Taylor and his purchase? He decided it was better to save rather than to incur bad debt. Clothes are available at an enormous variety of prices—from options at the local thrift store to high-end designer rags available only at the fanciest mall. No one is denying your need for clothing, even clothes you feel good about wearing. But, if you go into debt to buy a $200 pair of jeans, you could wind up spending $300 after paying off both the debt and the interest over time.

Costs Associated with Loans/Reducing the Sizes of Loans

You use credit when you borrow money or use a credit card to pay for an item. Credit gives you the means to buy something right now even though you lack cash. Then, you pay for it later. But, there are costs associated with the convenience of using credit.

Tracking and Managing Credit Card Expenditures

Your credit card bill, or credit card account statement, lists all the purchases, fees, and interest charged to your account. Most people would not buy something without looking at the price tag. Yet, more than a few pay their credit card bill without looking at the details of the account statement. The first step to managing your credit card is understanding your bill. Let's take a closer look at a credit card bill.

Getting Help with Managing Debt

Your efforts to manage debt have failed, so now, it is time to take further action. First, you can try working with a debt counselor to create a payment plan to pay off your debt. A second approach is to work with a debt settlement company and negotiate with creditors to accept less than the amount due on the debt. Both of these debt payment approaches have consequences that need to be understood before selecting either one. When considering outside help, be cautious and know exactly what the organization offers. Before you agree to accept help, make sure you get everything in writing so you can review the terms of the offer or agreement. Consumer Credit Counseling—1 Consumer credit counseling (also known as debt management) is a service that works with consumers when their debt becomes unmanageable. This is the next step after budgeting has failed and the financial crisis has worsened. Often, the counselor will work with the consumer to develop an effective debt management plan (DMP) to reduce and eliminate the debt. Remember, this service is supposed to offer credit counseling. There are both profit and nonprofit credit counseling agencies. Some charge fees, and others ask for a contribution. In the past, some credit counseling services have taken advantage of consumers. It is important to evaluate the reputation of any service. You can use telephone directories or the Internet to find and evaluate any credit counseling service. There are several steps involved with credit counseling: The counselor reviews the consumer's income and debt, helps to set up a payment plan, and may help to enroll the consumer in a DMP. The counselor communicates with the consumer's creditors about the plan. The counselor works to help reduce interest rates and waive fees on credit cards and other forms of debt to alleviate some of the pressure while under the plan. The counselor helps consolidate debt and arranges to make the monthly payments to the creditors on the consumer's behalf. The consumer sends monthly checks to the credit counseling service. It is important to keep receiving statements from your creditors so you can verify that the credit counseling organization is making the payments on time and in the correct amounts. Keep all documentation in reference to this DMP. You may have to pay for this service, so shop around for the best rates and the most reputable firm. Consumer Credit Counseling—2 Credit counseling is supported by, and in the best interest of, credit card companies. If cardholders have a payment plan, the credit card companies have a better chance of getting paid. They would rather lower the interest rate and waive their fees if it means getting paid. The consumer's credit rating is not hurt for using this type of service. Before choosing a consumer credit counseling organization, make sure you ask the following questions: What services do they offer? Specifically, what types of educational, budgeting, and counseling services do they offer? Are the counselors trained and certified in debt management and budgeting? Do not work with an agency that has been trained by credit card companies. That means they will be working for the companies, not you. What is this going to cost me? Do not pay for information you receive in a phone call. Ask specific questions about their services and understand how they work before you pay anything. Do they offer services in your state? Have they registered in or have a license in your state to offer services? What is their success rate? What are their privacy policies? How do they keep your personal and financial information secure and protected? How specifically will they help you resolve your debt problem? Before using this service, check them out with the Better Business Bureau, your state Attorney General's office, and your local Consumer Protection Agency. Check to see if there have been any consumer complaints against them. Visit the state of Virginia Attorney General's office online at www.oag.state.va.us/ (Links to an external site.) or call 804-786-2071. Source: "Facts for Consumers—For People on Debt Management Plans: A Must-Do List." ftc.gov. Federal Trade Commission, Dec. 2005. Web. 10 Sept. 2011.

Setting Aside Money for Annual and Monthly Expenses

a budget is a spending plan that shows your anticipated income and your expenses. If you can create a reasonable budget and stick to it, you are well on your way to making your financial dreams a reality