Objective [1]
Analyze the major sources of consumer credit.
The major sources of consumer credit are commercial banks,
savings and loan associations, credit unions, finance companies,
life insurance companies, and family and friends. Each of these
sources has unique advantages and disadvantages.
Parents or family members are often the source of the least
expensive loans. They may charge you only the interest they
would have earned had they not made the loan. Such loans,
however, can complicate family relationships.Objective [2]
Determine the cost of credit by calculating interest using
various interest formulas.
Compare the finance charge and the annual percentage rate
(APR) as you shop for credit. Under the Truth in Lending law,
creditors are required to state the cost of borrowing so that you
can compare credit costs and shop for credit.
For a borrower, the most favorable method of calculating the
cost of open-end credit is the adjusted balance method. In this
period, creditors add finance charges after subtracting payments
made during the billing period. The Rule of 78s favors lenders.
This formula dictates that you pay more interest at the beginning
of a loan, when you have the use of more money, and pay
less and less interest as the debt is reduced. Because all the payments
are the same size, the part going to pay back the amount
borrowed increases as the part representing interest decreases.Objective [3]
Develop a plan to manage your debts.
The Fair Debt Collection Practices Act prohibits certain practices
by debt collection agencies. Debt has serious consequences
if a proper plan for managing it is not implemented.
Most people agree that emotional problems, the use of
money to punish, the expectation of instant comfort, keeping up
with the Joneses, overindulgence of children, misunderstanding
or lack of communication among family members, and the
amount of finance charge are common reasons for indebtedness.Objective [4]
Evaluate various private and governmental sources that
assist consumers with debt problems.
If you cannot meet your obligations, contact your creditors immediately.
Before signing up with a debt consolidation company,
investigate it thoroughly. Better yet, contact your local
Consumer Credit Counseling Service or other debt counseling
organizations.
Such organizations help people manage their money better
by setting up a realistic budget and plan for expenditures. These
organizations also help people prevent debt problems by teaching
them the necessity of family budget planning and providing
education to people of all ages.Objective [5]
Assess the choices in declaring personal bankruptcy.
A debtor's last resort is to declare bankruptcy, permitted by the
U.S. Bankruptcy Act of 1978. Consider the financial and other
costs of bankruptcy before taking this extreme step. A debtor
can declare Chapter 7 (straight) bankruptcy or Chapter 13 (wage
earner plan) bankruptcy.
Some people find obtaining credit more difficult after filing
bankruptcy. Others find obtaining credit easier because they
have relieved themselves of their prior debts or because creditors
know they cannot file another bankruptcy case for a period
of time. Obtaining credit may be easier for people who file a
Chapter 13 bankruptcy and repay some of their debts than for
people who file a Chapter 7 bankruptcy and make no effort to
repay their debts.
