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Money management skills are more important today than ever. Many middle classAmericans with good incomes are living from paycheck to paycheck. Our collegestudents increasingly find themselves buried in credit card debt. How could thishappen in an educated society?
In school we learned about all kinds of things: math, science, history, and art toname a few. When we graduated from high school or college, our teachers told usthat we were ready for the “real world.” For the most part, they were right. Butthere was one critical piece of the puzzle that was missing. Most of us were nevertaught the one skill that can make our lives much easier: money management. Inour world of easy credit, self-directed retirement plans and even electronic paychecks,today’s consumer is faced with a variety of financial issues that did not exist fifteenyears ago. Throw in the intense competition for our money through an unendingblizzard of television commercials, billboards, and magazine ads for everythingfrom health care to mortgages to Hawaiian vacations, and the sheer volume offinancial choices can be overwhelming.
At GoodPayer.com, we are dedicatedto helping everyone find their way tofinancial security. Whether you arehaving a financial difficulty or wantto learn the steps you can take toavoid one, you will find helpfulinformation here to assist you. Weunderstand the financial issues anddecisions you face, and we are hereto help. You will find informationthat can help people of all ages andfinancial circumstances makeinformed financial decisions. Visitus today at www.goodpayer.com.
Table of ContentsBudgeting: Getting to know your cash....................1
Saving: The most important thing you can do!......10
Understanding credit reports.................................15
Understanding credit scores...................................20
How to re-establish credit.....................................23
Your debt-to-income ratio and you.......................25
How to deal with bill collectors............................29
Checking accounts: Following your green............41
Resources...............................................................57
Things you should know........................................63
In today’s changing economic times, establishing a financial plan is very important
in building a strong financial future. The best way to establish your plan is to
create a budget. It is the only way to get a grip on your spending and see if your
money is used the way that will benefit you the most. There are several steps
to creating a budget.
Step 1: Estimate your monthly take-home income and expenditures.
• Gather all your bills, including credit card statements, receipts for groceries,
gas, or anything else that you bought with cash. You should also have
your checkbook register available to review additional expenditures.
Note: If you have not been keeping records, you may need to keep track
of every dollar you spend for a month before an accurate budget can be
created.
• Make “best-guess” estimates when necessary.
Step 2: Journalize your spending.
• It is recommended that you keep a small note pad (Spending Journal) to
record all purchases you make.
• Save all receipts so they may be compared to the Spending Journal.
Step 3: Review your progress.
• Routinely compare actual spending to the budget. This will help to reduce
or eliminate some expenses.
• Identify areas that may require adjustments.
Making a Financial Plan
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When establishing a budget, spending can generally can be separated into five
categories: housing, debt, travel, savings, and other. Each category should
take up a certain percentage of income. These percentages are as follows:
Home: 35%
Travel: 15%
Debt: 15%
Savings: 10%
Other: 25%
To determine what percentage you spend for each category, divide the TOTAL
from that category by the Total Available Monthly Income, then multiply that
number by 100.
Example: TOTAL for Home is $600, Total Available Monthly Income $2,000.
600 ÷ 2000 = 0.3
Note: To get a percentage, multiply 0.3 x 100. This would be 30%.
When the budget is initially created, these percentages may not fall within the
recommended parameters. Continue to journalize and review your spending
habits. This can help with making adjustments to your budget and allow you to
come up with additional ways to maximize your spending.
A Plan in Motion
The following is an example of how budgeting can help you to achieve your
financial goals. We will look at an imaginary individual’s Initial Budget, analyze
their situation, restructure their spending, and see an adjusted budget.
Page 2
Page 3
Budget Review
Page 4
Home Section:
• Enrolls in utility budget plans that distribute their costs evenly over the
year. Saves $40.
• Enrolls in a monthly calling plan from the phone company. Saves $20.
• Downgrades their high-speed Internet service. Saves $15.
• Downgrades their cable service to a basic package. Saves $25.
• Cuts coupons, gets a shopping savings card, and purchases generic
products. Saves $50.
Travel Section:
• Increases their insurance deductible. Saves $25.
• Signs up for an electronic toll collection system that offers a discount.
Saves $12.50.
Debt Section:
Credit card debt totals approximately $10,000, spread over three cards (MGNA:
18% interest, $3,500 balance; SityBanc: 13% interest, $2,000 balance; Bleet:
9% interest, $4,500 balance). The decisions made do not automatically reduce
the payment; however, they will save money in interest costs down the road.
• Moves the balance from the MGNA card to one with a lower rate.
• Contacts SityBanc and asks for an interest rate reduction. They reduce it
by two percentage points because they have a good repayment history.
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Savings Section:
Because they made changes in their budget, they are able to increase their
monthly savings to the recommended 10%.
Other Section:
• Stops going to restaurants. Saves $140.
• Although they like getting take-out three times a month, they cut back to
once a month. Saves $50.
• They buy a coffeemaker and they bring a thermos to work, allowing them
to cut back on their Muco Grande coffee runs. Saves $80.
• They cut out the snacks. Saves $25.
• Picks up the dry cleaning sheets they can use in their dryer. Saves $42.
• Joins a video rental club that allows unlimited rentals for $25 a month and
cuts out going to the movies. Saves $55.
• Joins a gym that has a lower membership fee. Saves $40.
• Shops around for a better cell phone plan. Saves $20.
Let’s take a look at the Adjusted Budget.
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Monthly Income
Salaries ______________________
Wages if self-employed ______________________
Commissions ______________________
Dividends ______________________
Rental Income ______________________
Other (Child Support, and so on) ______________________
Total Available Income
Home
Mortgage/Rent/Housing __________
Property Tax __________
Home Owner/Renter Insurance __________
Gas/Electric/Oil __________
Water __________
Garbage __________
Phone __________
Internet Access __________
Cable/Satellite __________
Furniture/Appliances __________
Maintenance __________
Groceries __________
TOTALS (Home) __________
Travel
Car Payment __________
Insurance __________
Gasoline __________
Maintenance __________
Registration __________
Tolls __________
Parking __________
Bus/Subway/Train __________
TOTALS (Travel) __________
Debt
Credit Cards __________
Student Loans __________
Other __________
TOTALS (Debt) __________
Savings
Savings Amount __________
Other
Restaurants __________
Take Out __________
Coffee/Tea __________
Snacks __________
Alcohol __________
Clothing __________
Shoes __________
Dry Cleaning __________
Movies __________
Concerts __________
Publications __________
Hobbies __________
Haircuts __________
Makeup __________
Hygiene __________
Physicians/Hospital __________
Dentists __________
Medication __________
Therapy __________
Gym __________
Tobacco __________
Cellphone __________
Day Care __________
Tithing/Giving __________
Other __________
Other __________
Other __________
TOTALS (Other) __________
Totals % of Budget
Home __________ __________
Travel __________ __________
Debt __________ __________
Savings __________ __________
Other __________ __________
Total Available Income __________
TOTAL Expenses __________
Balance (+/-): __________
Do you have excess or are you short? __________
To find the percentage of each category, divide your TOTALfrom that category by your Total Available Monthly Income,then multiply that number by 100.
Example: TOTAL for Home is $600, Total AvailableMonthly Income $2,000.600 ÷ 2000 = .30 x 100 = 30%
Personal Monthly Budget Worksheet
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Projections Actual
Weekly Journalizing Worksheet
Instructions: Track your spending each day under the daily column. At the end of each week,total your expenses for each category and calculate your “Total Expenses.” Use the blank spacesto add additional items.
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Expense Monday Tuesday Wednesday Thursday Friday Saturday Sunday Total
Groceries
Gasoline
Tolls
Parking
Bus/Subway/Train
Restaurants
Take Out
Snacks
Alcohol
Clothing
Shoes
Dry Cleaning
Movies
Concerts
Publications
Hobbies
Make Up
Hygiene
Tobacco
Tithing/Giving
Other _______________
Other _______________
Other _______________
Other _______________
Other _______________
Other _______________
Other _______________
Other _______________
Other _______________
Monthly Journalizing Worksheet
Instructions: Copy your spending for each week into the appropriate areas. At the end ofeach month, total your expense for each category and calculate your “Total Expenses.” Subtractyour monthly expenses from your monthly income. Do you have excess money or are youshort? Look for ways to cut back your expenses.
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Expense Week 1 Week 2 Week 3 Week 4 Week 5 Total
Groceries
Gasoline
Tolls
Parking
Bus/Subway/Train
Restaurants
Take Out
Snacks
Alcohol
Clothing
Shoes
Dry Cleaning
Movies
Concerts
Publications
Hobbies
Make Up
Hygiene
Tobacco
Tithing/Giving
Other __________________
Other __________________
Other __________________
Other __________________
Other __________________
Other __________________
Other __________________
Other __________________
Other __________________
Saving and InvestingWe all know that money can be used to buy things, but did you know you could
use your money to make money? Saving and investing allows you to build
wealth and be prepared for what the future holds.
Compound Interest
Compound interest is a very powerful tool for making your money grow, and
involves earning interest on interest you have already received. Let’s say you
put $1,000 in a savings account that pays 5% interest. At the end of the year,
you will have received $50 in interest. Now you have $1,050. ($1,000 x 5% =
$50). In the second year, you will earn 5% on $1050, or $52.50. Notice that
your money grew faster. You made $50 in the first year, and $52.50 in the
second. This is how compounding works. The longer the money stays in the
savings account, the faster it will continue to grow, so it is a good idea to start
a savings plan as soon as you can.
The Rule of 72
If you had $1,000 lying around, decided to put it into an account and never
made another deposit, in a certain amount of time that money would double.
That is the cool aspect of compound interest. By using the Rule of 72, we can see
how long it will take to double your money. All you have to do is divide 72 by the
interest rate the account was paying. Sounds simple, so let’s check it out. If
you look at an account that earns 4% on your money, you would do the math as
follows: 72÷4 = 18. It would take you 18 years to double your money. Not too
shabby!
Risk and Return
There are many ways to save money and build wealth, some of them riskier than
others. The more risk, the more potential you have to build wealth. As an
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example, let’s compare two ways to make your money grow: a savings account
and a stock. A savings account has very little risk; the money you put into it is
insured by the FDIC and there is very little chance of losing it. On this type of
account you would probably earn about 1.5% interest. Stocks, on the other
hand, are very risky. There are many factors that can cause you to lose your
money. Because of the high risk, over time you could probably earn an average
of between 10% and 11% in interest.
By using the Rule of 72, let’s see how long it would take to double $1,000 in a
savings account versus investing in a stock. In a savings account you would
earn 1.5% interest, so you would do the math as follows: 72÷1.5 = 48 years.
Investing in a stock, you would earn about 11% interest, so: 72÷11 = 6.5 years.
As you can see, more risk definitely equals more return.
Diversify
Putting all your eggs in one basket is not a good idea. With the high risk of
investments, you really do not want to put all your cash into the stock market.
Why? Well, the market is volatile and no stock is a sure thing. If you put all your
money there and lose it, you are ruined. By spreading your money out between
both low- and high-risk items, you do not risk losing everything if your investment
goes bad.
The Taxman and Inflation
There are two more hurdles you must take into consideration: taxes and inflation.
You will pay taxes on any interest earnings you make. These taxes are used on
both the federal and state levels to fund the government. Depending on your
tax bracket, you could contribute as much as 30% of your earnings to taxes.
Inflation saps the growth of your money because in inflationary periods, the
value of money decreases over time. Essentially, inflation occurs when the
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prices of goods and services rise. These prices rise because of supply and
demand within our economy, but this is not an economics lesson, so let’s forge
ahead. Historically, inflation has grown at a rate of 3% each year. Let’s look at
an example. Say you bought a soda today for $1. Next year that soda may cost
you $1.03. In ten years that soda might cost you $1.30. This will hurt you if
you are not getting a greater return on the money you have in the bank. If you
were earning 2% interest, your money would be growing at a rate 1% behind
inflation. If you saved the dollar for soda and were earning 2% interest on it,
next year that dollar would be worth $1.02; in ten years that dollar would be
worth $1.20.
When you want your money to grow, you have to be sure that the return, or
interest, is greater than the taxes you will pay and that your interest rate is
always higher than the rate of inflation.
Ways to Make Your Money Grow
Savings Accounts: A deposit account that is
offered by banks and credit unions. The bank lends
your money to people needing loans. In return
for using your money for loans, the bank pays you
interest, though at a relatively low rate. You do
have full access to your money and may withdraw
it at any time.
Certificate of Deposit (CD): A special type of
deposit account that pays a higher rate of
interest than a regular savings account. The
reason you are paid a higher amount is that
you agree not to access the money for a
This meter shows the different types ofinvestments that are available. As weknow, the riskier the investment, thegreater the potential to build wealth.
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specific amount of time, such as 3 months, 6 months, 1 year, and so on.
If you do withdraw the money, you will pay a penalty.
Money Market Account: These accounts act like a combination of a checking
and savings account. You earn interest on these accounts at a higher rate than
on a standard savings account. Typically, you must maintain a minimum balance,
or pay a fee if you go below it. You can write checks against the funds in this
account, but there are limits as to how many.
Bond: When you buy a bond, you are lending money to a corporation or
government. In return for loaning them money, you get a specified interest
rate which, depending on the type of bond, is paid either at specific
periods during the life of the bond or when the bond matures. These are
generally long-term investments.
Mutual Funds: A mutual fund is an investment corporation that pools
together investors’ money to purchase stocks and bonds. The advantage
offered by this type of investment is that it is diverse and not dependent
on the performance of a single stock or bond. The mutual fund itself does
the diversifying for you for much less of an investment than if you were
buying each stock individually. A mutual fund is managed full-time by a
Fund Manager who decides which stocks to buy and sell every day. Their job is
to maximize the return from your investment while maintaining the appropriate
risk level.
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The future is uncertain. According to the actuaries (special statisticians) at the
Social Security Administration, the Social Security Trust Fund should be depleted
by 2042. People are living longer, and, if Social Security disappears, many are
going to be in a tough spot.
The most important thing you can do to protect your future is to begin saving at
a young age. As you can see in the example above, the difference in beginning
to save at the age of 20 as opposed to 30 can be more than $750,000, even with
a modest monthly investment. If Social Security does go away, that $750,000
would come in pretty handy, wouldn’t it?
Age Years Investing At Retirement20 47 $1,160,22330 37 $403,00540 27 $136,32150 17 $42,399
The Earlier, the BetterUsing the following example, let’s look at how much money you would have bythe time you retire. This example is based on beginning a savings plan at differentstages of your life. You would contribute $75 each month and earn a return of11% on your investment (this is the historic rate of return for stocks). All figuresare approximate.
Stocks: By purchasing shares of a stock, you become part owner of the company.
This does not mean you can walk in and use the executive washroom, though.
If the company does well over time, the value of the stock should go up. If you
sell the stock, you make a profit. Some companies pay their shareholders
dividends, which are percentages of their earnings. Stocks are definitely a long-
term investment.
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Credit ReportsA credit report is a record that contains information showing your credit history
for every charge you’ve made. The initial use of the credit report was for creditors
to judge your past credit performance to see if you met their criteria for lending.
Over the past decade or so, the use of these reports has changed. Insurance
companies now use them to determine premiums and many prospective
employers review reports to establish the character of their job candidates.
There are three major credit bureaus, TransUnion, Equifax, and Experian, and
each maintains separate credit files on you. This is because different creditors
report to different bureaus. It is important that you are able to navigate your
way through your report to know what it says.
Types of Reports
The following are the two types of credit reports:
• Consumer Version: Consumers are the only individuals who have access
to this version. A consumer version of a credit report lists all inquiries,
including promotional inquiries, account numbers, and account
management inquiries.
• Business Version: The business version is an abbreviated version of the
consumer version. This is the credit report that lenders see. The business
version does not contain promotional inquiries, account numbers, or account
management inquiries.
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Contents of a Credit Report
The following are the four primary categories of information contained in each
type of credit report:
• Personal information
• Credit history
• Public records
• Inquiries
Personal Information
• Full name
• Current and previous addresses
• Social Security number
• Telephone number
• Date of birth
• Current and previous employers
Credit History
A credit report’s credit history section shows how you have paid your credit
accounts in the past and is used as a guide to determine whether you are likely
to pay accounts on time in the future. A credit report’s credit history section
generally includes a listing of the credit accounts from the last ten years.
Each entry includes information, such as:
• Account number
• Creditor’s name
• Amount borrowed
• Amount owed
• Credit limit
• Date when the account was opened, updated, or closed
• Timeliness of payments
• Late payments (these are noted as a negative activity)
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Public Records
A credit report’s public records section includes:
• Tax liens
• Bankruptcies, and
• Court judgments (including child support judgments)
Inquiries
A credit report’s inquiries section includes a listing of creditors or authorized
users who have requested a copy of your credit report. The following are the
three types of inquiries:
• Normal Inquiries: Lenders are given permission to view your report to
determine if you are a good candidate for lending.
• Promotional Inquiries: Creditors review the credit bureaus’ databases
based on a set of parameters and receive mailing address information for
individuals matching their criteria. They are not viewing reports, they just
want to give people who meet their parameters a firm offer of credit.
• Account Management Inquiries: Creditors who have permission to review
the credit reports of their account holders may do so on a periodic basis.
Many creditors have permission to do this as one of the terms of the
lending contract.
The Fair Credit Reporting Act (FCRA) protects consumers from being penalized
for inquiries that they did not initiate or request. Therefore, promotional and
account management inquiries are excluded from the business version of credit
reports.
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A credit report does NOT include information regarding the following:• Race
• Gender
• Religion
• Sexual orientation
• National origin
Reviewing Reports
The best way to know what is contained in your credit report is to review it
carefully. It is recommended that you review each of your three credit reports
(TransUnion, Equifax, and Experian) at least once a year to make sure there are
no errors.
The information on each report may vary from one bureau to another. This is
because not all creditors report their information to every credit bureau.
The following information is required when ordering credit reports:
• Social Security number
• Date of birth
• Current and previous addresses for the past five years
• Maiden name (if applicable)
There may be a fee for ordering reports. Some states have laws that require
credit bureaus to provide one or two free reports every year to their residents.
Credit reports are also free for consumers who have recently been turned down
for credit. The consumer must ask the bureau that produced the credit report
for a copy within a specified period of time, usually 60 days.
• Medical history
• Checking or savings accounts
• Personal lifestyle
• Political preferences
• Criminal record
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Correcting Errors
Credit reports should be accurate, and it is very important to make sure that
they are. If there are errors or outdated information on a credit report, it could
hurt your chances of getting a new loan and cost you money because creditors
will charge you higher interest rates if you’re approved. Each bureau initiates an
investigation of any credit information disputed by a consumer. It is
recommended that while a dispute is being investigated, the consumer does not
apply for credit.
Investigations are usually concluded within 30 days of the date the bureau
received them. If additional information is needed for the investigation, the
credit bureau will contact you and let you know what is needed to continue to
process the dispute.
As part of its investigation, the bureau will check with the creditor whose
information is being questioned. If the bureau finds that the information in the
credit report is inaccurate, the creditor must notify the other major credit bureaus
of the error so that they can correct their information.
If the disputed information cannot be verified within a 30-day time frame, the
disputed item is deleted from the credit report or updated as requested. However,
if the disputed information is subsequently verified, it will be reinserted into the
report and you will be notified.
A revised report, reflecting the results of the investigation, is sent to the consumer
at the conclusion of the investigation.
Credit Bureau Contact InformationEquifax: (800) 685-1111Experian: (888) 397-3742TransUnion: (800) 888-4213
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Credit ScoresCredit scores are the numerical translation of your credit report. It takes all of
your information, such as the number of lines of credit you have and how you
have managed them, and assigns an overall number. This number is between
300 and 850 (the higher the better) and tells a lender how likely you are to
repay a loan and if they can expect your payments on time.
With the introduction of credit scores to the public several years ago, the transition
to being referred to simply as a number (your credit score) began. Your “number”
can hold you back from getting a job, an apartment, and even increase your
insurance premiums. Now more than ever it is important to keep your credit in
good standing.
There are different types of credit scores. The most commonly used scoring
system was devised by the Fair Isaac Company and is most often referred to as
a FICO score. Under the FICO system, there are five major categories that make
up a credit score.
Payment History: 35% of Score
This is a huge factor in determining a credit score. Lenders obviously want to
know how a consumer has managed their financial obligations in the past. Late
payments are not a complete negative; however, they are definitely frowned
upon. An overall good credit score can outweigh one or two instances of late
payments. It is important to realize that having no late payments does not
constitute an automatic approval, either.
This factor evaluates the following:
• Payment information. This includes payments on all types of loans, such
as Visa, MasterCard, American Express, retail store credit cards, installment
loans, finance company accounts, and mortgage accounts.
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• Public record and collection items. These include bankruptcies, judgments,
lawsuits, wage garnishments, and collection items. These are considered
serious; however, older items count less than recent items.
• No late payments. Each account without late payments will increase a
credit score.
Amounts Owed: 30% of Score
Many consumers carry balances on their credit cards, car loans, mortgages, and
other types of accounts. Depending on the amounts owed, it can mean that the
consumer is overextended, which may lead to late payments or no payments at
all. This factor determines if the consumer can currently manage more credit
responsibly.
This factor evaluates the following:
• What is owed. Even if an account is paid in full, a credit report may still
show a balance on that account. The balance on the consumer’s last
statement is generally what is shown on their credit report.
• Who is owed. Part of this score takes into consideration the amount owed
on specific types of accounts, such as credit cards and loans.
Length of Credit History: 15% of Score
A longer, positive credit history will increase a score. However, those with
shorter credit histories may still get high credit scores depending on what the
rest of their credit history is like.
This factor evaluates the following:
• The age of accounts. This takes into consideration the age of the oldest
account and the average age of all the accounts.
• How often the accounts are used.
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New Credit: 10% of Score
Opening several new accounts or having many inquiries into your credit history
in a short period of time will affect your chances of qualifying for credit. The
FICO system distinguishes between searching for many new credit accounts
and shopping around for lower rates.
This factor evaluates the following:
• New accounts. This takes into consideration the age of the newest accounts.
• Recent credit history. If there was a period of late payments and the
consumer has re-established his or her credit, the score will rise over time.
What Types of Credit Used: 10% of Score
This factor does not usually play a big part in the lender’s decision to extend
credit; however, if there is not a lot of information in the other factors, this factor
will become more important.
This factor evaluates the following:
• The mix of credit cards, loans, finance accounts, and mortgages the
consumer has.
These five factors are all considered when establishing the consumer’s credit
score. No one factor will, by itself, determine the score. Depending on the
information in the credit report, however, one factor can play a more important
role in the overall score, regardless of the percentage that particular factor
contributes. When a lender receives a credit score, they will also receive up to
four “score reason codes.” If the score was low, these codes will explain why.
Expansion Scores
People who are relatively new to credit can experience difficulty obtaining
financing, or getting the best interest rates because they lack an established
credit history. Approximately one-fourth of all adult U.S. consumers, roughly 50
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million individuals, either lack credit reports entirely or have credit reports with
too little information to make a good prediction of credit risk. This group includes
immigrants, young adults, people who are recently divorced or widowed, and
other groups that typically don’t use credit very often.
These consumers have often found it difficult to obtain financing for their first
credit card, auto loan or home mortgage. One reason for this is that credit
bureaus only add consumers to their database when a creditor, collection agency
or other business sends it credit-related information involving that consumer.
Consumers can be missing from credit bureau files if the consumers have not
yet opened a credit account or have insufficient credit activity. To assist these
consumers, Fair Isaac and Company have developed their FICO Expansion score.
The purpose of this new score is to predict the credit risk of consumers who don’t
have a traditional FICO score. The Expansion score is a credit risk score based
upon non-traditional consumer credit data (in other words, not based on data
from the major national credit bureaus, TransUnion, Equifax and Experian).
Examples of such data include deposit account records, pay day loan cashing,
and purchase payment plan performance. Because it uses alternative data
sources, the Expansion score helps lenders extend credit to consumers who are
typically excluded from the traditional credit-granting process.
Unlike traditional FICO scores that range from 300 to 850, these new Expansion
scores will range from 150 to 950. The same logic behind traditional FICO
scores applies, meaning that the higher the score a consumer earns, the less of
a risk they are to lend to. As with traditional credit scores, consumers turned
down for credit based on the new scores will be able to get a copy of their credit
report, which they can challenge or take steps to improve.
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Increasing Your Credit ScoreIt’s important to realize that if your score is low, it won’t necessarily stay like
that forever. A score is a “snapshot” of your credit history at any point in time.
It changes as new information is added to your credit history, and it can improve
if you manage your credit responsibly.
We know that credit scores are made up of five parts. Let’s see what you can do
within each of these parts to improve your overall score.
Payment History
Pay your bills on time. Delinquent payments and collections can have a major
negative impact on your score.
If you have missed payments, get current and stay current. The longer
you pay your bills on time, the better your score.
Be aware that paying off a collection account will not remove it from
your credit report. It will stay on your report for seven to ten years.
Amounts Owed
Keep balances low on credit cards. High outstanding debt can affect a score.
Pay off debt rather than move it around. The best way to improve your
score in this area is by paying down your revolving credit. In fact, owing the
same amount but having fewer open accounts may lower your score.
Don’t close unused credit cards as a short-term strategy to raise your
score.
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Don’t open a number of new credit cards that you don’t need. This
approach could backfire and actually lower your score.
Length of Credit History
If you have been managing credit for a short time, don’t open a lot of
new accounts too rapidly. New accounts will lower your average account age,
which will have a greater effect on your score than if you don’t have a lot of other
credit information.
New Credit
Re-establish your credit history if you have had problems in the past.
Opening new accounts responsibly and paying them off on time will raise your
score in the long term.
Types of Credit Used
Apply for and open new credit accounts only as needed.
Have credit cards - but manage them responsibly. In general, having
credit cards and installment loans (and making timely payments) will raise your
score. Someone with no credit cards, for example, tends to be a higher risk than
someone who has managed credit cards responsibly.
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A measure widely used by lenders to gauge the financial stability of loan applicants
is called the debt-to-income ratio. A high debt-to-income ratio jeopardizes the
applicant’s chances of securing loans for major purchases, such as a car or a
home. Maintaining a low debt-to-income ratio makes it easier for a consumer to
qualify for the lowest interest rates and best terms.
The debt-to-income ratio is represented as a percentage and compares your
monthly debt payments to your gross monthly income.
The first step in calculating your debt-to-income ratio is to figure out your gross
monthly income (before taxes). Next, list the current minimum payments on all
credit cards and loans. Be sure to include the following:
• car payments and other installment loan payments
• bank/credit union loans
• credit lines
The debt-to-income ratio can be calculated as your monthly debt payments ÷
your gross monthly income. Example: Monthly debt payments = $700,
Gross monthly income = $3,200.
Debt-to-income ratio = 700 ÷ 3200 = .218 Note: To get a percentage,
multiply 0.218 by 100. This would be 21.8%. Round up to 22%.
Generally, the lower a debt-to-income ratio is, the better the consumer’s financial
condition. The following are examples of the different percentages:
Note: All answers are providing that the consumer’s FICO score is above 700.
Debt-to-Income Ratio
10% or less: Should not have trouble getting loans. May qualify for lower
rates.
11%–20%: Again, should not have trouble getting loans. Time to scale back
on spending.
21%–35%: Although the consumer may not have trouble getting new credit
cards, they are spending too much of their monthly income on debt repayment.
36%–50%: They may still qualify for certain loans, but it will be at higher
rates. It is time to develop a plan to get out of debt.
More than 50%: Very difficult to qualify for financing. If you do qualify, it will
be at the highest interest rates allowed.
Why Use Your Gross Income?
When qualifying for a high-ticket item, such as a home, gross income allows you
to afford “more of a home.” Although you can qualify for a larger mortgage
amount, you must always remain conscious of what you can actually afford.
Let us return to Andy, a consumer who does not take affordability into
consideration.
• Andy has an annual gross income of $70,000.
• His gross monthly income is $5,833.
• He qualifies for a $188,500 mortgage.
• His monthly payment is $1,254.
Looking at this scenario, it does not look like Andy will have any problem making
his monthly payment, but remember, this is his gross. Let’s take a look at what
his net income (take home) would be.
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• Andy has an annual gross income of $70,000
• He is in a 30% tax bracket.
• He pays $21,000 a year in Federal tax.
• He pays $2,800 a year in State tax.
• He pays $4,340 a year in Social Security.
• He pays $720 a year in Medical insurance.
• His net income would be 70,000 – 21,000 – 2,800 – 4,340 – 720 =
41,140.
• $41,140 is what Andy would bring home each year, or $3,428 a month.
• Andy’s monthly mortgage payment would be 36.5% of his net income.
Let’s take a closer look at what Andy’s budget would be like by taking into
consideration all of his expenses.
• Home: $1,884 (55%). This includes mortgage payment and other related
home expenses.
• Travel: $550 (16%)
• Debt: $350 (10%)
• Savings: $214 (6%)
• Other: $430 (12.5%)
Because he applies for the maximum mortgage he can qualify for, Andy can’t
save all that much. His total for Home is 19% higher than it should be. Because
his expenses are not really bad, he can still save money, but only 6%. If he runs
into an emergency down the road, he may have trouble getting through it.
You should always take into consideration your net income. This is what you will
have to work with when meeting all of your financial obligations. If Andy took
this into consideration, he might have chosen a more modest home and been
more comfortable financially.
FICO Score/Debt-to-Income Ratio ExampleOne of the first big-ticket items you will buy is a car. Let’s take a look at theeffects of a good FICO score and a low debt-to-income ratio versus a low FICOscore and a high debt-to-income ratio. For the purposes of this example, we willbe using a car valued at $20,000.FICO Debt-to- Interest Monthly Total Interest
Score Income Ratio Rate Payment Paid
720 to 850 (High) 18% (Low) 5% $460.59 $2,108.19
500 to 589 (Low) 38% (High) 19% $598.00 $8,704.14
Good vs. Bad Debt-to-Income Ratio ExampleLet’s take a look at two consumers earning the same income and how their debtswould affect their debt-to-income ratios.
Consumer A: Income is $3,500 a month, monthly debt payments are $650.
Math: 650 ÷ 3500 = 18% debt-to-income ratio. Good.
Consumer B: Income is $3,500 a month, monthly debt payments are $1350.
Math: 1,350 ÷ 3500 = 38% debt-to-income ratio. Bad.
Next, we are going to see that when FICO scores are used in conjunction with
debt-to-income ratios, the interest you would be charged is affected.
As you can see, by having a low FICO score combined with a high debt-to-
income ratio, you would have to pay $137.41 more per month and over $6,500
more in interest for the same car. Crazy, but true!
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As we all know, all sorts of things can happen in life, many of them unpleasant.
In your lifetime, you may have a financial setback that may cause you to fall
delinquent on your bill payments. This can be stressful, especially when you
have to deal with collection calls. Collectors are notoriously aggressive. No
matter how many times you tell a collector that you cannot afford to make a
payment, or can only pay a little, the calls keep coming and coming. It seems
like you can’t do anything about it.
When dealing with collection calls, it is important to keep in mind that a collection
call is just that, a phone call. As unpleasant as it may be, do not let a phone call
ruin your day. Now is the time to make a plan to repay those companies and
manage your immediate needs. First, you need to satisfy your essential needs,
such as mortgage/rent payments, food, transportation, utilities, and insurances.
You don’t want to get into a position where you are paying the bill collector who
is screaming the loudest. As we all know, a bill collector is not the least bit
concerned about your situation. The only thing they are paid to do is collect as
much money from you as quickly as possible. It really is that simple.
Believe it or not, most collectors have a very good understanding of your situation.
An experienced bill collector will know that you are stressed and probably at
least a little scared, and he or she knows you want to pay the bill—most people
do. What you will find as a result is that some collectors are overly aggressive,
bossy, and impossible to negotiate with. This type of collector will prey on your
fear. But there are other collectors who are polite, pleasant, and persuasive.
These collectors are trying to get you to relax and let your guard down. Many
collectors are somewhere in between. They will typically start off as the polite
collector but, if you tell them you can’t pay, they may become more aggressive.
Let’s review a few common collection scenarios. The first involves someone who
Dealing with Bill Collectors
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does not have the ability to pay. The second involves someone who can make
a partial payment, but not enough to bring his or her account current. The third
involves someone with a newly stabilized income.
Cardholder With No Money
This is perhaps the most difficult situation to be in because it virtually guarantees
an onslaught of phone calls. Generally speaking, if a cardholder is able to make
even just a partial payment, the collectors will probably not call again for about
a week. If no payment is made, it is possible that you will get another call the
very next day, depending on your state laws.
The absolute best thing someone in this situation can do is talk to the collectors.
Tell them your situation, why you cannot pay, and when you think you will be
able to start paying. The reason this is important is that your situation will be
notated on all of your accounts. The creditors will know your situation and may
even offer a hardship payment plan to assist you. It is very important not to
make any promises you cannot keep. Don’t bother telling them the “check
is in the mail” because they’ve heard it a million times before. Do not set up a
check by phone if you know it will bounce. Just tell the creditors what’s going
on and, if you’re not in the mood to speak with them, make use of your answering
machine.
The collectors will still try to convince you to pay, even after you tell them you
cannot. They will suggest borrowing from family, selling assets, or maybe even
paying with another credit card. Simply repeat that you have no way of paying
and politely get off the phone. There is no reason to get into an argument. Just
tell them the truth and move on with your day.
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Cardholder With Some Money
If you are in a position where you are in the process of getting back on your feet
financially, you are not going to be able to satisfy the demands of all the collectors.
It is important to keep in mind that the best course of action is not to pay those
collectors who are screaming the loudest. Too often, consumers will try and
satisfy one collector, but leave nothing for other collectors. Ultimately, you will
have to satisfy all the collectors, not just the one who is the most persistent. Be
sure to take care of your essential bills first (mortgage/rent, utilities, car loans,
and so forth). Work with the collectors using the funds you feel you can put
toward your accounts after your essential needs are taken care of.
Cardholder With a Newly Stabilized Income
If you are in the process of starting a new job, you may not be in position to give
the collectors the amounts that they are currently looking for. At the very least,
you should send the minimum payments on the accounts that you have been
able to pay in the past. This helps you to establish your commitment toward
your debt repayment and helps protect you should a creditor attempt to move
forward with any type of legal action.
If you are still communicating with your original creditor and not a collection
agency, you may be able to have your account brought current and stop the
calls altogether. Here’s how. The creditors have a tool called a “re-age”. A re-
age occurs when the creditor accepts a payment of a specified amount (usually
two percent of the balance) for two to three months in a row and, once these
payments are made, the account is brought current with no need to make up
any further back payments. Keep in mind that the calls usually continue until
the account is brought current, so be prepared to explain that you have set up
a re-age with another representative and be sure to make the next scheduled
payment on time. Depending on the creditor and the amount of money you
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have available, you may be able to negotiate a payment plan. Many creditors
have hardship plans that reduce payments, re-age accounts to bring them
current, and reduce interest rates. These plans usually last six months to a year
and are not designed to pay off the account. They are intended to bring your
account current and to re-establish a good payment pattern, which is what you
want to do at this point, anyway.
If you continue to receive resistance from creditors to the attempts you are
making, it may not be a bad idea to contact a debt management service, such
as Cambridge Credit Counseling Corp. You can talk to a certified Counselor to
see what options are available to you and how their service can help.
Before agreeing to a payment of any kind, make sure you evaluate your entire
financial situation. It is extremely important that you make payment
arrangements based on your ability to pay, not based on which collector is
screaming the loudest.
Common Collection Tactics
Here are some tactics and phrases that are common to all bill collectors.
“We need a check over the phone TODAY.”
This is what collectors are trained to do: get paid as soon as possible. Also,
many collectors work on commission, or some combination of salary and
commission. If you can pay, do so. THERE IS NO REQUIREMENT TO MAKE A
CHECK BY PHONE, WESTERN UNION QUICK COLLECT, OR OVERNIGHT MAIL.
If you are comfortable with these methods of payment, fine. If you are not
comfortable, tell the collector you will mail the payment through regular mail.
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“If this situation is not resolved today, we MAY have to take further
action.”
You won’t usually hear this until your account is three or more months behind.
Notice two things about this statement. One, they “MAY” have to do something.
This word is key because it is illegal for a collector to say they WILL do something
unless they intend to do so. Second, they use the phrase “further action”
without specifying what that action will be. The collector is intentionally vague
to make sure he or she does not violate the law. Most of the time, if the call gets
to this point, the collector knows you are not going to pay and is trying to
intimidate you into doing so. Do not be intimidated.
“I understand you’re having a hard time. But you have to understand
that your account is three months behind and requires a payment
immediately. I find it hard to believe that over the last three months
you haven’t been able to send us anything at all.”
This is one of the ways collectors use emotion to get you to pay. If a collector
questions their integrity, many people will pay, even if they cannot afford to, in
an effort to show their good intentions. This approach is also useful to the
collector because debtors almost always volunteer more information about their
situation in an effort to justify their delinquency. No one wants to be accused
of skipping payments intentionally, and the collectors know how to use this
tactic well.
“That is not acceptable.”
This response comes up when there is a large amount due and the debtor can
only offer a small, partial payment. Do not get upset or intimidated, and do not
argue. You know how much you can afford, so try to make it work for you. Tell
the collector how much you can afford and ask if it is enough to begin a re-age
or payment plan. If it is not, find out how much they would need to begin a
payment plan or re-age. It is usually about two percent of the balance. If you
don’t have enough, just tell the collector that you will send what you can, when
you can.
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“I’m going to note that you’re refusing to pay.”
This is just pure intimidation. Furthermore, it is false. You are not refusing to
pay, you are unable to pay. Do not panic. It doesn’t matter what the bill
collector notates on the account. Banks don’t decide to sue based on what a
collector writes on an account. There are many factors, including balance,
credit history, how many other creditors you owe, and how far behind you are.
If a collector threatens to put words in your mouth like this, don’t be afraid to
ask for a supervisor and clarify that you are not refusing to pay.
There are many more tactics and phrases that collectors use, and they are all
designed to do one thing—convince you to pay immediately. The Fair Debt
Collections Practices Act (FDCPA) governs what a bill collector can and cannot
do. The law defines a bill collector as a third party; this would be a collection
agency. The law does not bind a creditor’s in-house collection department, but
the vast majority of creditors have adopted the FDCPA as their company policy.
If at any time you feel a collector has violated this act, contact your Attorney
General’s Office or the Federal Trade Commission (FTC).
Cease and Desist Requests
The FDCPA gives consumers the right to request that a collection agency stop
calling. This is called a Cease and Desist request. Most consumers who are
experiencing collection calls would like nothing better than for the calls to stop.
They are stressful, inconvenient, and sometimes even scary. In order to make
a Cease and Desist request, the debtor must write a letter to the collection
agency requesting that all communications stop. Once this letter is received by
the agency, they are only allowed to contact the debtor to inform him or her of
any further action the agency intends to take. The FDCPA states the following:
(c) CEASING COMMUNICATION. If a consumer notifies a debt collector in writing
that the consumer refuses to pay a debt or that the consumer wishes the debt
collector to cease further communication with the consumer, the debt collector
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shall not communicate further with the consumer with respect to such debt,
except—
(1) to advise the consumer that the debt collector’s further efforts are
being terminated;
(2) to notify the consumer that the debt collector or creditor may invoke
specified remedies which are ordinarily invoked by such debt collector or
creditor; or
(3) where applicable, to notify the consumer that the debt collector or
creditor intends to invoke a specified remedy.
If such notice from the consumer is made by mail, notification shall be complete
upon receipt.
(d) For the purpose of this section, the term “consumer” includes the consumer’s
spouse, parent (if the consumer is a minor), guardian, executor, or administrator.
Consumers beware! It is true that the FDCPA requires the collection agency to
stop calling once it receives a Cease and Desist request. But it is also true that
sending a Cease and Desist request makes it much more likely that you will be
sued for non-payment.
Think about it this way. Let’s say you lent $3,000 to Edna Peebles, and Edna
stopped making payments. You call Edna to find out what’s going on and she
claims that she can’t pay a dime. You understand that she is having problems
making payments, but you still need to get your money back. Two days later,
a certified letter from Edna arrives, requesting that you stop all communication
with her. At this point, it is not very likely that you will be paid. If you cannot
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call or write to her to make a payment arrangement, there is not much you can
do to collect on the debt. In fact, your only real option is to take Edna to court.
That is the same position a debtor puts his or her creditors in by writing a
Cease and Desist request. The only way to collect money from someone who
cannot be contacted is to sue for the amount owed.
Most creditors follow the FDCPA even though they are not required to. If a
creditor receives a Cease and Desist request, it will probably be honored. But
the creditor will probably sue, as well. There are some creditors and collection
agencies that automatically place accounts into the litigation process upon
receipt of a Cease and Desist request. It is important to keep in mind that not
all creditors and collection agencies will sue upon receipt of a Cease and Desist
request, but legal action does become more likely.
Collection calls are not fun. Lawsuits are even less fun. Consumers should
think very carefully before sending a Cease and Desist request to a collection
agency or creditor. It could be a very costly mistake.
The following are some suggestions for dealing with collectors:
• Do not be frightened or intimidated. As unpleasant as it may be, a
collection call is just another phone call.
• Do not make any agreement or arrangement that you are not able to
afford. Too many consumers make unmanageable payment arrangements
in an effort to make the calls stop, leading to missed mortgage or auto
payments.
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• Explain your situation to the collectors. They may not seem too concerned,
but they will notate your accounts. You can even request that something
be noted. This way, your situation is documented with each creditor.
• Do not be rude or otherwise combative. Stay in control of both yourself
and the phone call. Do not be afraid to hang up if the collector is rude or
otherwise unprofessional. It is also all right to request the collector’s
supervisor if the collector is being unprofessional. There is no guarantee
that you will get a supervisor on the phone, but occasionally you will.
Know Your Rights
The Fair Debt Collection Practices Act (FDCPA) also protects consumers from
unfair and abusive collection practices. The law regulates professional, third-
party collection businesses, agents, and attorneys, but not “in-house” collectors
or employees of creditors who collect their own debts.
The following are some of the provisions of this act:
• A collector may contact debtors in person, by mail, telephone, telegram,
or fax. However, a debt collector may not contact a debtor at inconvenient
times or places, such as before 8 a.m. or after 9 p.m., unless the debtor
allows it. Also, a debt collector may not contact a debtor’s workplace if the
collector knows that the debtor’s employer does not allow personal calls.
• A debtor can forbid a collector from contacting them by writing to the
collection agency requesting that they discontinue their actions. Once the
collector receives the letter, they may not contact the debtor again, except
to say there will be no further contact or to notify them that some specific
action may be taken. It is important to know that sending such a letter to
a collector does not erase the debt if the monies are actually owed. The
debt collector or the debtor’s original creditor may still have the right to
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sue the debtor and it is likely they will do so if they are requested to cease
communication with the debtor.
• A collector has a limited ability to contact a debtor for a collection of debt.
For instance, the collector must contact the debtor directly, unless the
collector is informed that they must contact the debtor’s attorney regarding
the debt. The collector may also contact other people, but only to find out
where the debtor lives, what their phone number is, and where they work.
Collectors are usually allowed to contact third parties only once, unless
they believe that the person gave incorrect or incomplete information.
Debt collectors may not harass, oppress, or abuse debtors or any third
parties they contact. Examples of harassment would include the
following:
• threatening violence
• using profanity and obscenities
• making repeated telephone calls
Debt collectors may not use any false or misleading statements when
collecting a debt. Examples of false statements would include the
following:
• implying that they are attorneys or government representatives when
they are not
• implying that the debtor has committed a crime
• falsely representing that they operate or work for a credit bureau
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• misrepresenting the amount of the debt owed
• indicating that papers being sent are legal forms when they are not
• indicating that papers being sent are not legal forms when they are
Also, collectors cannot state any of the following:
• that a debtor will be arrested if they do not pay the debt
• that they will seize, garnish, attach, or sell property or wages, unless the
collection agency or creditor intends to do so and it is legal to do so
• that actions, such as a lawsuit, will be taken against the debtor when such
action may not legally be taken or when they do not intend to take such
action
They are also prohibited from the following:
• giving false credit information regarding the debtor to anyone, including
a credit bureau
• sending the debtor anything that looks like an official document from a
court or government agency when it is not
• using a false name
Debt collectors may not engage in unfair practices when they attempt
to collect a debt. For example, collectors may not do the following:
• collect any amount greater than the debt, unless state law permits such
a charge
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• deposit a postdated check prematurely
• use deception to make the debtor accept collect calls or pay for telegrams
• contact the debtor by postcard
You should report any problems you have with a debt collector to your state
Attorney General’s Office and the FTC. Many states have their own debt
collection laws. Your Attorney General’s Office can help you determine your
rights.
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A checking account is a valuable tool to use in your day-to-day financial operations,
but failing to keep track of your transactions can lead to some big headaches. A
checking account allows you to deposit funds and withdraw the available money
on demand, typically by writing a check. A check is a document instructing a
bank to pay money from a checking account to a specific person or establishment.
There are different types of accounts available to consumers. They are as
follows:
Basic Checking: This account is for people who use a checking account for little
more than paying bills and daily expenses, and who do not maintain a high
balance. Some basic accounts require direct deposit or a low minimum balance
to avoid fees.
Some banks have different types of basic accounts, so you should get answers
to the following questions:
• Do they require direct deposit or a minimum balance?
• Do they charge a monthly fee for services?
• Do they charge a fee for each check you write over a certain limit?
Interest-Bearing Account: This account pays interest on the money you have
in it. It usually requires a minimum balance to open, with an even higher
balance to maintain in order to avoid fees. Interest is paid monthly, at the end
of your statement cycle. Be aware that the fees for falling below the minimum
balance may be more than any interest you might earn.
Joint Checking Account: This account is owned by two or more people, usually
sharing a household and expenses. Each co-owner has equal access to the
account.
Checking Accounts
Express Account: Designed for people who prefer to bank by ATM, telephone,
or personal computer. Because you do not spend much time working with bank
employees, express accounts usually offer the following:
• Unlimited check writing
• Low minimum balance requirements
• Low or no monthly fees
When you do visit a bank branch, you can expect to pay a fee to talk to a teller
on either a per-visit or monthly basis.
Lifeline: Lifeline checking accounts are designed for low-income bank customers.
Lifeline accounts have the following:
• Low minimum deposit and balance requirements
• Low monthly fees, ranging from $0 to $3, depending on the bank
• Limits on the number of checks per month that you can write
Certain states have laws requiring banks to offer Lifeline accounts. Currently,
those states are IL, MA, MN, NJ, NY, RI, and VT. In these states, the rules and
regulations for Lifeline accounts are determined by state laws.
“No-Frills” Checking Account: Many banks offer special checking deals if you
are 55 or older, or a student. The benefits may include:
• Free personal checks
• Free cashier’s or travelers checks
• Wider ATM use
• Better rates on loans and credit cards
“Free Checking” Account: “Free Checking” accounts typically require you to
maintain a minimum balance in your account, but certain fees, like ATM and
per-check fees, are eliminated. This reduced fee structure can be an attractive
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checking alternative for some people. However, it is important that you maintain
the minimum balance or your account will no longer be “free” and you will be
charged fees.
NOW and Super NOW Accounts: A NOW account (Negotiable Order of
Withdrawal) is both a “Free Checking” and an interest-bearing account offered
by a savings and loan or “thrift” institution. Typically, the minimum balance on
a NOW account exceeds that of a “Free Checking” account and, if your balance
falls below the minimum, you could pay a high fee. A Super NOW Account has
a higher interest rate and a higher minimum balance than the NOW Account.
Picking a Financial Institution
For most people, picking a financial institution is as simple as choosing one that
is located near where they live. It is important to understand that all banks are
not created equal and that the services offered differ between institutions. You
have to be sure that the services offered fit both your long-term and short-term
goals.
The following are other things you need to consider when looking for a bank:
• Look for the FDIC symbol. Institutions that are insured by the Federal Deposit
Insurance Corporation will protect your deposits up to $100,000. You can find
FDIC stickers on the doors and teller windows of insured financial institutions.
• Consider putting all of your accounts in one financial institution. Why? Many
financial institutions use the combined balance of all your accounts in
calculating monthly account service charges. You could save money if you
consolidate to one account.
• Use the web to do your research. Checking out the websites of potential
financial institutions is a quick and easy way to find out about services, types
of accounts, and rates.
Monthly Maintenance Fees: _________
(NSF) Bounced Check Fees: _________
Telephone Center Fees: _________
ATM Fees: _________
Overdraft Fees: _________
What types of fees does the institution charge? Are you comfortable with these fees?
____ Yes ____ No
When do you plan to do most of your banking?
____ Regular Business Hours ____ Evenings
____ Weekends
Do you plan on using the internet for banking?
____ Yes ____ No
____ Savings
____ Basic Checking
____ Interest-Bearing Checking Account
____ Joint Checking Account
____ Express Checking Account
____ Lifeline
____ “No-Frills” Checking Account
____ “Free Checking” Account
____ NOW Account
____ Super NOW Account
____ Other ___________________________
What type(s) of account(s) do you need? Are the types of accounts you need offered at
this institution?
____ Yes ____ No
What are the Minimum Balance Requirements,
if any?
Savings: _________ Checking: _________
Can you maintain these minimums?
____ Yes ____ No
Institution Name: _______________________
Does the institution accommodate your schedule?
____ Yes ____ No
Does the institution offer online banking?
____ Yes ____ No
For your convenience, you can use the Banking Institution Questionnaire below
to help you in your search for an appropriate bank. Feel free to make copies and
use one for each institution you visit so that you can compare them and see
which is best suited to your needs.
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Writing a Check
11
5 6
7
8
9 10
4
2 31
1. Personal Information: Your name and address.Some banks allow you to have your Social Securitynumber printed here as well; however, it is notrecommended.
2. Bank Transit Number: Information about your bankand your account.
3. Check Number: The number of the check you arecompleting.
4. Date: The date you are writing the check.
5. Pay to the Order of: You would enter the name ofthe company or individual the check is intended to pay.
6. Dollar Amount (Numerals): Write in the dollaramount of the check in numerals. Do not leave anyempty spaces in the box so others may not addadditional information.
7. Dollar Amount (Words): Write in the dollar amountof the check in words. Start at the far left side of theline. Follow the dollar amount by the word “and” thenwrite the cents over the number 100. Draw a linefrom the end of the 100 to the end of the line.
8. Bank Name: The name of your institution and itslocation.
9. Memo: Write in what the check payment is for.
10. Signature: Sign your name as it appears at the topof the check. Do not sign the check until you intend touse it.
11. Bank Information: The order of these numbersvaries; however, the first nine numbers should be thebank routing number, followed by your account number,and ending with the number of the check you arewriting. They are printed in a special magnetic ink forthe bank clearinghouses to read.
Tips for Writing a Check
• Only write checks when you have enough money in your account to cover
them. Do not write a check on a promise from a friend or rely on a
paycheck to be deposited in time to cover your check. If you do not have
the money in the account, do not write the check.
• Write your checks legibly.
• Write the check amount as far to the left as you can. This prevents others
from adding in numbers, making the amount of the check larger than you
intended.
• Always use a pen to write checks.
• Do not erase mistakes on a check. Either write "Void" across the check or
write "Void" next to its number in the check register and tear up the
check.
• Do not sign blank checks. They can easily be stolen or used by someone
else.
• Print the correct date on your checks.
• Always keep your checks in a safe place. Your checks are another form of
money. They can be stolen and used by other people, just like cash. If
your checks are ever lost or stolen, contact your financial institution
immediately.
• Destroy voided or unused checks and deposit slips. There is a line of
computer numbers at the bottom of every check called an MICR code.
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Counterfeiters can use this information to fraudulently use your account.
To prevent fraud, thoroughly tear up or shred all checks and deposit slips.
• Record every transaction. Keep track of when you use your debit card, the
amount of money you take out of the ATM, and any other withdrawals.
They add up quickly. It only takes a few minutes and can prevent overdrafts
and additional fees.
• Use all of the columns in your check register so that you can easily identify
transactions.
• Keep a running balance in your checkbook. If you do not calculate your
balance right away, you run the risk of spending more money than you
have or dropping below your minimum balance, resulting in additional
fees.
How Your Check Gets Paid
After you write a check, it has to be processed. Processing typically takes five
business days to complete. The majority of checks in the United States are
processed by an association of banks, or clearinghouses. These banks or
clearinghouses exchange millions of checks that will be paid by the banks whose
customers wrote them.
Some banks deposit checks for processing at other banks, or at one of the
Federal Reserve System’s check processing centers located throughout the
country. The Federal Reserve is the central bank of the United States, and it
serves as a “bank for banks.” The Federal Reserve’s check processing centers
process about one-third of the checks written in the United States, primarily
those checks paid by banks not in the same city as the banks that deposited
them.
Using Your Check Register
To keep trackof the moneyin yourcheckingaccount, addeverytransactioninto yourcheck register.To ensure thatyour balancedoes not getaway fromyou, entereachtransactionIMMEDIATELY.
1 2 3 4 5 7 86
1. Number: If you are writing a check, the number wouldgo here. If not, leave blank. The check number islocated in the upper right-hand corner of your check.
2. Date: The date you wrote the check, made a deposit,used your debit card, and so forth.
3. Description of Transaction: Write what thetransaction was for (the Payee, Deposit, ATM Use).
4. Payment/Debit: Record the amount of the check orwithdrawal. This will be subtracted from your balance.
5. Code: Fill in the type of transaction you are making ifyou are not writing a check. When you receive yourstatement each month, place a check mark here if thetransaction is listed.
Codes: D - Deposit, ATM - Automatic Teller Machine,DC - Debit Card, TT - Telephone Transfer, T - TaxDeductible, AP - Automatic Payment, O - Other
6. Fee: Record the fee, if any, for the transaction. Thiswill be subtracted from your balance.
7. Deposit/Credit: Record the amount of any depositsor credits to your account. This will be added to yourbalance.
8. Balance: Write down the amount in your account aftersubtractions (payment) or additions (deposit).
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We have seen how to use a register for a single entry, now let’s review how touse the register for ongoing transactions.
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3
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5
6
1
1. This is your beginning balance: $600.00
2. You sent check number 1001 on April 4 for your CarPayment. The amount of this transaction was$430.00. To come up with your new balance, youwould subtract the $430.00 payment from yourbeginning balance of $600.00 (600 - 430 = 170).Your new balance would be $170.00.
3. On April 5 you made a Withdrawal. The amount ofthis transaction was $100.00. You used an ATM andthere was a fee of $1.00. To come up with your newbalance, you would subtract the $100.00 withdrawaland the $1.00 fee from your balance from the previousline, which is $170.00 (170 - 100 - 1 = 69). Yournew balance would be $69.00.
4. On April 7 you made a Deposit. The amount of thistransaction was $756.94. To come up with your newbalance, you would add the $756.94 deposit to yourbalance from the previous line, which is $69.00 (69+ 756.94 = 825.94). Your new balance would be$825.94.
5. On April 10 you went to the Supermarket. Theamount of this transaction was $58.73. You used yourDebit Card. To come up with your new balance, youwould subtract the $58.73 debit card transaction fromyour balance from the previous line, which is $825.94(825.94 - 58.73 = 767.21). Your new balance wouldbe $767.21
6. You sent check number 1002 on April 11 for yourABC Bank Credit Card payment. The amount of thistransaction was $125.00. To come up with your newbalance, you would subtract the $125.00 paymentfrom your balance from the previous line, which is$767.21 (767.21 - 125 = 642.21). Your newbalance would be $642.21.
Depositing Funds Into Your Account
(Back)
9
10
(Front)
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3
7
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6
4
1. Personal Information: Your name and address.
2. Bank Transit Number: Information about your bank and youraccount.
3. Date: The date you are making the deposit.
4. Signature: If you get cash back from a deposit, you would signhere.
5. Bank Name: The name of your institution and its location.
6. Bank Information: The order of these numbers varies; however,the first nine numbers should be the bank routing number, followedby your account number, and ending with the number of the checkyou are writing. They are printed in a special magnetic ink for thebank clearinghouses to read.
7. Cash: The amount of cash you are depositing.
8. Check Entry Area: You would write down each check you aredepositing. Put each check on its own line.
9. Additional Check Entry: The back of the deposit slip shouldhave additional spaces for checks if you run out of room on thefront. Put each check on its own line.
10. Additional Check Entry Total: Add up the checks listed on theback of the slip ONLY and write the total dollar amount here.
11. Subtotal: Add up all of the cash and checks and put the totaldollar amount here.
12. Less Cash Back: If you want to deposit part of your money, andget part of your money in cash, you would write the dollar amountof cash you want here.
13. Net Deposit: Subtract any cash back you received from yourdeposit, and write the remaining amount here. This is your netdeposit.
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(Front)
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2
3
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(Back)
5
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1. Date: The date you are making the deposit.
2. You are depositing $375.00 in cash. Write it here.
3. You are depositing a check from your Uncle Garfunkle in theamount of $25.00. Write it here.
4. You are depositing a rebate check from the ACME Corp. in theamount of $76.52. Write it here.
5. Since you have more checks, begin to write the additional oneshere. You are depositing a check from your friend Joe in theamount of $79.20. Write it here.
6. You are depositing a check from your tax refund in the amount of$152.36. Write it here.
7. You are depositing a check from your neighbor Skip in the amountof $48.86. Write it here.
8. Add up the checks listed on the back of the slip and list the amounthere (79.20 + 152.36 + 48.86 = 280.42). $280.42 wouldbe the amount to list.
9. Add up the cash you are depositing, the checks listed on the frontof the slip, and the checks listed on the back of the slip and listthe amount here. (375 + 25 + 76.52 + 79.20 + 152.36 +48.86 = 756.94). $756.94 would be the amount to list.
10. You would write any cash back here.
11. Add up the cash you are depositing, the checks listed on the frontof the slip, the checks listed on the back of the slip, subtract anycash back you want and list the amount here. (375 + 25 +76.52 + 79.20 + 152.36 + 48.80 - 0 = 756.94). $756.94would be your net deposit.
Endorsing a Check
1 2
3
To deposit a check, you need to
endorse it. That means you sign your
name in ink on the back of the check.
You must sign your name the same
way it is written on the check.
There are a few different ways to
endorse your check.
1. Blank Endorsement: Sign your
name the same way it is written
on the front of the check. Make
certain to sign it only when you
are ready to cash it or deposit the
money into your account.
2. Special Endorsement: Do this
when you want to give someone
else the money. Write "pay to the
order of" and that person's name
below it, then sign your name
underneath. Now that person is
the only one who can cash the
check.
3. Restrictive Endorsement:
When you want your check to be
very safe (like when you send it
to your financial institution in the
mail) use this kind of
endorsement. Write "for deposit
only" and sign underneath.
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Bank Statement ABC TreeBank6547 My StreetAnytown, NY 02020
Bill Buster1234 Your StreetAnytown, NY 10101-0202
Checking Account Number: 25456923This statement shows transactions for the period: April 1, 2005 to April 25, 2005
Date Description Amount Balance
Beginning Balance $600.00
4-5 ATM Withdrawal $101.00 $499.00
4-7 Deposit $756.94 $1,255.94
4-8 1001 $430.00 $825.94
4-10 Supermarket Store 89 $58.73 $767.21
4-20 1002 $125.00 $642.21
Activity SummaryDeposits (+): $756.94Checks (-): $305.00Misc. Debits (-): $159.73Fees (-): $0.00Ending Balance: $642.21
Thanks for banking with us. Our Customer Service Number is 1-800-202-2525.
Your Monthly Statement
1
3
5
6
2
4
1. Bank Name: The name of your institution and itslocation.
2. Personal Information: Your name and address.
3. Account Information: The type of account andthe Account Number.
4. Statement Period: The dates that the statementcovers.
5. Activity Summary: An overview of your creditsand debits as well as the balance remaining at theend of the period.
6. Transaction Summary: A detailed listing of yourcredits and debits. Note that the dates for the checksyou have written are those on which the bankprocessed them, not when you wrote them.
Bank Statement ABC TreeBank6547 My StreetAnytown, NY 02020
Bill Buster1234 Your StreetAnytown, NY 10101-0202
Checking Account Number: 25456923This statement shows transactions for the period: April 1, 2005 to April 25, 2005
Date Description Amount BalanceBeginning Balance $600.00
4-5 ATM Withdrawal $101.00 $499.004-7 Deposit $756.94 $1,255.944-8 1001 $430.00 $825.944-10 Supermarket Store 89 $58.73 $767.214-15 ATM Withdrawal $151.00 $616.214-20 1002 $125.00 $491.214-20 1003 $75.00 $416.214-24 1005* $35.75 $380.464-25 Shady Tree Checking Fee $3.50 $376.96
*Skip in check numbers
Activity SummaryDeposits (+): $756.94Checks (-): $665.75Misc. Debits (-): $310.73Fees (-): $3.50Ending Balance: $376.96
Thanks for banking with us. Our Customer Service Number is 1-800-202-2525.
Balancing Your Account
Each month you will receive a statement from your banking institution. There will usually be a difference between thestatement’s ending balance and your register balance. When you receive this statement, you will have to reconcile thedifference to make your account balance out.
For the example above, we will be using the register located on the opposite page to reconcile the statement. We willbe utilizing the back of the statement on the page following the register to show the proper way to reconcile.
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2
3
1. On the statement, you will notice that it skips from check 1003 to 1005.
There is an asterisk (*) next to the listing of check 1005, indicating that
there is a skip in the checks presented against your account for payment.
2. The deposit you made was after the statement period, therefore it is not
reflected on this statement.
3. The statement indicated that the bank has deducted your monthly checking
fee. You would need to enter this into your register.
Please go to the following page to see how to use the reconciliation sheet provided on the
reverse side of your statement.
1. You would enter the $415.00 deposit you made afterthe statement period here.
2. You would enter the check that did not show on thisstatement here. In this example, it would be checknumber 1004 and the dollar amount of $72.50.
3. You would enter the ending balance from the front ofthe statement here. This is located under the AccountSummary portion of the statement. In this example itwould be $376.96.
4. You would enter the total dollar amount of your depositsnot showing on the statement here. In this example itwould be $415.00.
5. You would add the ending balance of $376.96 and thetotal deposits of $415.00 here for a total of $791.96.
6. You would enter the total dollar amount of yourwithdrawals that are not showing on your statementhere. In this example it would be $72.50.
7. You would subtract your total dollar amount ofwithdrawals, $72.50, from the Subtotal line, $791.96,and get $719.46. This amount should be the balancethat you have in your register. This will be the availablebalance remaining in your checking account.
Thanks for banking with us. Our Customer Service Number is 1-800-555-5555.
• In your account register, check off each transactionshown on the front of this statement.
• In the appropriate space to the right, list the depositsand checks or withdrawals that are listed in yourregister, but not on the statement.
• Total these two columns.
• ENTER your ending balance from the front of thisstatement.
• ADD the total of the deposits made to your account,but not listed on the statement, to your balance.
• SUBTRACT the total of the withdrawals made fromyour account, but not listed on the statement.
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Important ResourcesBeing in debt can be a very stressful situation. Financial anxiety can cause
problems at work, in the home, and in other ordinary situations we find ourselves
every day. In our effort to help people in as many situations as possible, we are
including this information to help you find the help you need.
Addiction
Debtors Anonymous
Description: A support group for those recovering from compulsive spending
problems.
Phone: 781-453-2743
Website: www.debtorsanonymous.org
Alcoholics Anonymous
Description: An international organization dedicated to helping people deal
with alcohol addiction.
Phone: Look in your local yellow pages to find a chapter near you.
Website: www.alcoholics-anonymous.org.
Narcotics Anonymous
Description: Assists people coping with drug addictions.
Phone: 818-773-9999 Extension 771.
Website: www.na.org
Gamblers Anonymous
Description: Helps people cope with gambling problems.
Phone: Look in your local yellow pages to find a chapter near you.
Website: www.gamblersanonymous.org.
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Credit Information
Trans Union
Description: An agency that maintains credit reports detailing how consumers
manage their credit obligations. You may order a copy of your report for review.
Phone: (800) 888-4213
Website: www.tuc.com
Equifax
Description: An agency that maintains credit reports detailing how consumers
manage their credit obligations. You may order a copy of your report for review.
Phone: 800-685-1111
Website: www.equifax.com
Experian
Description: An agency that maintains credit reports detailing how consumers
manage their credit obligations. You may order a copy of your report for review.
Phone: 888-397-3742
Website: www.experian.com
FAIR Isaac
Description: A source for understanding FICO scores and tips on improving
your score.
Website: www.myfico.com
Mortgages and Loans
HSH Associates
Description: Publisher of consumer loan information.
Website: www.hsh.com
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Fannie Mae
Description: Provides financial products and services that make it possible for
low-, moderate-, and middle-income families to buy homes of their own.
Website: www.fanniemae.com
Freddie Mac
Description: An organization that stabilizes the nation’s mortgage markets
and expands opportunities for homeownership and affordable rental housing.
Website: www.freddiemac.com
HomeSavers USA
Description: Helps Americans with their overdue mortgage payments.
Phone: 866-530-9949
Website: www.homesaversusa.com
Financial Websites
Bankrate.com
Description: Provides tools and information to help consumers make financial
decisions.
Cardweb.com
Description: An online publisher of information pertaining to all types of payment
cards.
Quicken.com
Description: Covers stocks, mutual funds, insurance, taxes and financing.
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Insurance
Insurance Information Institute
Description: Directory of insurance organizations, carriers, agents, brokers
and news links.
Website: www.iii.org
Medicare
Description: The federal health insurance program for people 65 years of age
or older, certain younger people with disabilities, and people with End-Stage
Renal Disease (permanent kidney failure with dialysis or a transplant, sometimes
called ESRD).
Phone: 800-633-4227
Website: www.medicare.gov
Medicaid
Description: A joint federal and state program that helps with medical costs
for some people with low incomes and limited resources.
Phone: 800-633-4227
Website: www.hcfa.gov
Tuition Financial Aid
Meritmoney.com
Description: Provides scholarship and financial aid information for high school
and college students.
Upromise
Description: A service that brings together America’s leading companies, top
investment firms and tax specialists to help families save more for college.
Website: www.upromise.com
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Government Agencies
U.S. Department of Housing & Urban Development (HUD)
Description: An organization created to increase homeownership, support
community development and increase equal access to affordable housing.
Website: www.hud.gov
Office of Child Support Enforcement
Description: Links to state child support agencies for inquires regarding
reductions in child support payments.
Website: www.acf.dhhs.gov/programs/cse/index.html
Social Security Administration
Description: Information regarding Social Security Disability Insurance, and
Supplemental Security Income.
Phone: 800-772-1213
Website: www.ssa.gov
Unemployment Benefits
Description: Helps consumer better understand benefits and eligibility.
Website: www.workforcesecurity.doleta.gov
Laws
Fair Credit Reporting Act
Phone: 877-FTC-HELP
Website: www.ftc.gov/bcp/conline/pubs/credit/fcra.htm
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Fair Credit Billing Act
Phone: 877-FTC-HELP
Website: www.ftc.gov/bcp/conline/pubs/credit/fcb.htm
Credit Repair Organizations Act
Phone: 877-FTC-HELP
Website: www.ftc.gov/os/statutes/croa/croa.htm
Fair Debt Collection Practices Act
Phone: 877-FTC-HELP,
Website: www.ftc.gov/os/statutes/fdcpa/fdcpact.htm
Equal Credit Opportunity Act
Phone: (877) FTC-HELP
Website: www.ftc.gov/bcp/conline/pubs/credit/ecoa.htm
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Annual Fee: A bank charge for the use of a credit card levied each year, billed
directly to the customer’s monthly statement.
Annual Percentage Rate (APR): The interest rate reflecting the total yearly
cost of the interest on a loan, expressed as a percentage rate.
Applicant: Any person who applies to a creditor for credit.
Balance Transfer: The process of moving an unpaid credit card debt from one
issuer to another.
Bankruptcy: The following are the two forms of bankruptcies that can be filed
by consumers and the one form that can be filed by companies:
Chapter 7: The court would discharge most of the consumer’s debts;
however, the debtor’s assets, excluding certain property exempted under
federal and state laws, would be subject to liquidation to satisfy those
debts. In other words, you could lose your personal property and even
your home. This is reported as a bankruptcy on your credit report for
seven to ten years.
Chapter 11: Reorganization proceedings, generally for business entities;
the debtor maintains control of the business in Chapter 11, unless the court
appoints a trustee.
Chapter 13: The bankruptcy court would restructure the repayment
terms of the debtor’s liabilities. The court would elect a trustee to disburse
the excess income provided by the debtor to satisfy their debts. The
Glossary
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debtor still has to make payments to the creditors. This is reported as a
bankruptcy on your credit report for seven to ten years.
Billing Period: The period during which your charges are applied to your credit
card. This is also the period used to calculate your balances and monthly
finance charges.
Cash Advance: Using your credit card to obtain cash at an ATM. The cash is
deducted from your credit limit and sometimes carries a higher interest rate
than purchases. Your card issuer may also charge you a fee for these transactions.
Charge Card: A card used to buy goods and services from the issuing merchant
on credit, usually due in 30 days.
Charge-Off: An account that has been written off by the creditor as a “bad
debt.” Each creditor has different guidelines as to when they will actually charge
off an account, but generally this occurs after 180 days. These accounts are
reported to the credit bureaus and may remain on your credit report for a period
of seven to ten years. Charged-off accounts will typically be sold to collection
agencies.
Collateral: Property or any tangible assets (car, boat, jewelry, etc.) used as
security to get a loan. Banks can lend money more easily if there is collateral
because they know if the consumer defaults on the loan, the lender can take the
consumer’s collateral.
Cosigner: Another individual who signs for a loan and assumes equal liability
for the debt.
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Credit Bureau (Credit Reporting Agency): A company that collects and sells
information on how people handle credit. It issues credit reports that list how
individuals manage their debts and make payments, how much untapped credit
they have available, and whether they have applied for any loans.
Credit Limit: The maximum amount of charges a cardholder may apply to the
account. The Consumer Federation of America suggests that people carry credit
lines no greater than 20% of their gross household income. For example, people
with a gross income of $50,000 should cap their credit lines at $10,000.
Creditor: Person or company with whom a consumer has an outstanding debt.
Credit Rating: An evaluation by a creditor or credit bureau that reflects a
debtor’s past credit history based on their payment pattern.
Credit Reports: Documents that are reviewed by loan companies, banks, and
so forth, giving them past credit history information for use in determining an
applicant’s creditworthiness.
Debit Card: A bank card with direct access to a cardholder’s account, usually
a checking or savings account. The card acts like a check in that the money is
withdrawn from the existing account balance. The withdrawal of funds is
immediate with online debit cards and delayed a day or two with offline debit
cards. Debit cards that carry the logo of either MasterCard or Visa can be used
at any location that displays that network’s logo.
Debtor: An individual who owes money.
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Delinquent: Any account that is not paid in accordance with the payment
guidelines stipulated by the creditor and agreed to by the debtor.
FICO Score: A credit score number is often called a FICO score, for Fair Isaac
Company, the Minnesota-based company that developed the system on which
it is based. The score is supposed to distill all the information in your credit
report. Scores range from the 300s to about 850, with the vast majority of
people falling in the 600s and 700s. The higher the score, the better.
Finance Charge: The charge for using a credit card, comprised of interest
costs and other fees.
Grace Period: If the credit card user does not carry a balance, the grace period
is the interest-free period of time a lender allows between the transaction date
and the billing date. The standard grace period is usually between 20–30 days.
If there is no grace period, finance charges will accrue the moment a purchase
is made with the credit card. People who carry a balance on their credit cards
have no grace period.
Gross Income: The amount you earn from working before taxes and other
deductions are taken out.
Introductory Rate: The low rate charged by a lender for an initial period to
entice borrowers to accept the credit terms. After the introductory period is
over, the rate charged increases to the indexed rate or the stated interest rate.
This is often called a “teaser” rate.
Judgment: A court ruling, stating that a debt is valid and must be paid. This
can be used as a first step in obtaining a wage garnishment.
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Late Payment Fee: A charge to a customer whose monthly payment has not
been received as of the due date or stated deadline for payment, as shown on
the billing statement.
Minimum Payment: The minimum amount a cardholder can pay to keep the
account from going into default. Some card issuers will set a high minimum if
they are uncertain of the cardholder’s ability to pay. Most card issuers require a
minimum payment of two percent of the outstanding balance.
Net Income: The amount of money left from your paycheck after taxes and
other deductions are paid.
Overlimit Fee: A fee charged for exceeding the credit limit on the card.
Payoff: When a consumer pays an account balance in full.
Pre-Approval: A credit card offer that is “pre-approved” only means that a
potential customer has passed a preliminary credit information screening.
Previous Balance: A method used by some card issuers by which finance
charges are based on the amount owed at the end of the previous billing cycle.
Revolving Line of Credit: An agreement to lend a specific amount to a borrower
and to allow that amount to be borrowed again once it has been repaid. Most
credit cards offer revolving credit.
Secured Credit Card: A credit card that a cardholder secures with a savings
deposit to ensure payment of the outstanding balance if the cardholder defaults
on payments. It is primarily used by people new to credit and by people trying
to rebuild their poor credit ratings.
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Secured Debt: A secured debt is a specific item used as collateral to guarantee
payment. If the payments cease, the creditor is entitled to the item designated
as collateral.
Subprime Lender: Lenders who charge higher interest rates to compensate
for potential losses from customers who may run into trouble or default. Subprime
borrowers have either missed payments on a debt or have been late with
payments.
Unsecured Debt: A debt that has no collateral linked to the debt. There is no
specific item that is guaranteed. If the debt is not paid, the creditor must sue
the consumer to try and collect.
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