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Managing Debt

Tips to help you avoid credit card trouble:

  • Look for a card with low interest rates or finance charges and low or no annual fees.
  • Recognize that a credit limit of $1,000 is plenty for most students.
  • Use the card only for emergencies. If you can eat it, drink it, or wear it, it's not an emergency.
  • Be careful of carrying balances. Some credit cards charge 18% or more in interest.

If you find yourself in trouble, don't panic. These tips will help you get out of debt:

  • Reduce your expenses for recreational activities.
  • Check with your credit card issuer to see if it can work out a repayment schedule with you.
  • Create a realistic budget to ensure you get out and stay out of debt.

Credit cards are easy to get but not necessarily easy to manage. People's Credit Union can help with all of your personal finance needs.


Calculate your debt-to-income ratio

It's good to know how lenders determine if you'll be able to afford your monthly payments comfortably, based on your income and other debts. Remember: Many lenders exceed these guidelines, particularly if you have no debt, good credit, or a large down payment when applying for a mortgage.


Use this guide to calculate your debt-to-income ratio:

Debt

Monthly mortgage or rent - $________

Minimum monthly credit card payments - $ ________

Monthly car loan payment - $________

Other loan obligations - $________

TOTAL MONTHLY DEBT PAYMENTS - $________

Income

Monthly gross salary - $________

Other monthly income (bonuses, overtime, and so on) - $________

Monthly alimony received - $________

TOTAL MONTHLY INCOME - $________

Total debt divided by total income = _______%

36% or less: This is an ideal debt load to carry for most people. Showing that you can control your spending in relation to your income is what lenders are looking for when evaluating if you are credit-worthy.

37% to 42%: Your debts still may seem manageable, but start paying them down before they begin to spiral out of control. At this level, credit cards still may be easy to obtain, but acquiring loans may be more difficult.

43% to 49%: Your debt ratio is high and financial difficulties may be looming unless you take immediate action.

50% or more: Seek professional help to make plans for drastically reducing your debt before it becomes a real problem.


Be smart about credit cards

The TV program guests told appalling stories. "I owe more than $26,000 on my credit cards," one said defiantly. Another, confessing that he liked to treat friends to expensive dinners out, admitted, "I've trashed my credit rating." And another, insisting she could manage her bills, said she had charged a staggering $50,000 on 11 different credit cards.

And the biggest jolt of all? These guests on TV's Oprah show all were college students in their late teens and early 20s. Two of them already had declared bankruptcy.

Many of the student guests said they'd first gotten a credit card at the sign-up tables at college registration areas. One young man, a student who'd worked registration as a recruiter for a national card company, said, "[students] are the bait, and we're the sharks." He explained that he earned points for each student he signed up.

All the participants said they'd learned some hard facts about using credit cards:

  • Be realistic about your expenditures. If you're covering routine expenses with credit, you're living beyond your means.
  • Understand the trap of minimum monthly payments. If you make a minimum payment--say the lesser of 2% of the balance or $25--on a $2,000 credit card balance, paying 18% interest, you won't pay off the balance for nearly 16 years, and you'll pay $3,328 in interest charges.
  • If you can't keep up with one credit card, it's foolhardy to add more. More cards do not mean more money coming in--they mean more going out, and for a much longer time.

If you're in credit trouble now, call 800.388.2227 to find a nonprofit affiliate of the National Foundation for Consumer Credit. This organization helps debtors get a handle on their bills and repair their credit while also meeting their obligations.


Don’t rush into bankruptcy

Consider that more than 617,000 Americans filed for bankruptcy in 2006. Some people now have a more casual attitude about bankruptcy, just as some are more casual about getting into debt in the first place. Filing for bankruptcy can be a big mistake.

Many people who declare bankruptcy end up wishing they hadn't. They find out the hard way that:

  • Bankruptcy mars your credit record. It stays on your credit report for seven to 10 years. You'll have a tougher time qualifying for future credit, such as a home mortgage. All your financial obligations don't vanish with bankruptcy. You'll still owe for alimony, child support, and most taxes.
  • Bankruptcy might even prevent you from getting a job, as employers sometimes check potential employees' credit reports.
  • Bankruptcies touch even closer to home when they involve credit union members. Because credit unions are member-owned cooperatives, the credit union's loss affects all members.

But what if you're snowed in debt? Is there another way out? Yes. Your options:

  • Start by talking to people at People's Credit Union. We may be able to help you or refer you to someone who can.
  • One resource the credit union may steer you to is a nearby office of the National Foundation for Credit Counseling, a not-for-profit organization. Financial counselors can set up a repayment plan to help you pay your debts. They also can act as intermediaries between you and your creditors.

Don't wait until you're in big trouble to seek help. Get financial help early so you don't have to even consider bankruptcy later.


Beware of campus credit card solicitations

Next time someone offers you a free T-shirt on campus, say no thanks and buy one at the bookstore. In the end, the bookstore T-shirt will cost less. That's because the free T-shirt comes with a credit card bearing high interest rates and hefty annual fees.

Credit cards can help you build a positive credit history while providing security in emergencies and enhanced personal responsibility and independence. But experts say it's best to avoid credit card solicitors on campus.

Students who sign up for credit cards at campus tables typically carry higher unpaid balances than those who do not. To meet your cardholder agreement, you'll need to make a minimum monthly payment. But by paying only the minimum each month your debt will continue to grow.

Experts caution students that a $1,000 or $2,000 credit limit doesn't mean they can afford to carry that balance. According to a Minnesota State Colleges and Universities Student Financing Survey, many students are turning to credit cards to pay for educational expenses.