Kansas City Finance

May 12 2018

Managing your debt

#debt #consolidation #loans #bank


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Managing your debt

What do creditors look for when applying for credit?

Creditors look at your ability to repay debt and willingness to do so. In some cases they may also look for a little extra security to protect their loans.

Creditors also speak of the three Cs: capacity, character and collateral.

Can you repay the debt? Creditors ask for employment information: your occupation, how long you’ve been with your current employer and how much you earn. They also want to know about your expenses: how many dependents you have, whether you pay alimony or child support, and the amount of your other obligations.

Will you repay the debt? Creditors will look at your credit history: how much you owe, how often you borrow, whether you pay your bills on time, and whether you live within your means. They also look for signs of stability: how long you’ve lived at your present address, whether you own or rent your home, and how long you have been in your present employment.

In some instances creditors also look for protection or collateral to cover their risk. In these instances they would want to know: are they fully protected if you fail to repay them? They also want to know what assets you have that could be used to back up or secure your loan and other resources you have for repaying debt other than income, such as savings, investments or property.

Creditors use different combinations of this information to reach their decisions. Some set unusually high standards; others simply do not grant certain kinds of loans. They also use different rating systems. Some rely strictly on their own instinct and experience. Others use a “credit-scoring” or statistical system to predict whether you’re a good credit risk. They assign a certain number of points to each of the characteristics that have proved to be reliable signs that a borrower will repay. Then they rate you on this scale.

Different creditors may reach different conclusions based on the same information. One may find you an acceptable risk; another may not grant you a loan.

How to establish a good credit rating

When entering into any credit agreements, for example, loans, instalment sale agreements or accounts at retailers, ensure that you make payments according to your agreement.

When you apply for a loan we will check your credit record to make sure you are good at paying your bills. The credit bureaus keep relevant credit records to help lenders assess applications. To assess your application we use information from other banks and retailers, which relates to:

  • Civil court judgment’s taken against you
  • Payment histories on your accounts
  • Known fraud information
  • Default or adverse listings, for example, debts handed over to an attorney for collection or written off by your creditors.

Manage your accounts carefully

The following are ways in which you can manage your accounts more effectively.

  • Don’t write cheques for an amount you do not have in your current account. You are responsible for ensuring there is money in your account to cover the cheques you issue as well as any debit and stop orders loaded to your account. Not keeping to this rule will, in most instances, result in us not covering the cheque or debit order and referring it back to you. We will charge you a penalty fee (dishonored fee) for each transaction that is referred back to you. Unpaid items on your accounts could negatively affect your ability to qualify for additional credit.
  • Do not allow any credit facility to go over the arranged limit.
  • Ensure that there is money in your accounts to cover debit orders, stop orders and any cheques you write.
  • Make sure that you budget for all your monthly account payments. It is considered very negative if you miss any payments even if you made a large payment in a particular month when you had extra cash. Your credit rating depends heavily on you making regular payments – large once-off payments every now and then do not make up for irregular payments even if they are larger than the minimum repayments added together.

Remember: every month credit providers give credit bureaus positive information which includes credit facilities that you have paid up to date as well as negative information, which includes information on missed or short payments. This information on your bureau record may count against you when you apply for credit.

Understand the impact of your debt

It is not so much having debt that is the problem it is the interest you pay. Before buying anything on credit make a quick calculation to determine what the real cost will be, including the interest. You might just change your mind.

How to estimate the cost of an item purchased on credit:

  • Take the number of payments you will be expected to make over the lifetime of the facility.
  • Multiply the number of payments you are required to make by the amount you are expected to pay monthly. This will give you the total cost of your debt.
  • Compare this amount to the cash price of the product that you want to buy; the difference is the finance cost you will pay to finance the debt as opposed to paying cash.

When comparing two credit offers/loans:

  • Always ask the credit provider to quote the interest rate in annual terms, for example, 17% a year and to explain all the fees that will be charged on the facility. Often credit providers fail to explain that you have to pay an initiation fee on or that monthly fees are charged.
  • Always compare different credit offers based on their full cost not just interest rate.
  • Do not take the loan with the lowest repayment. Often loans with smaller repayments will cost you more as the term over which you have to repay them will be longer resulting in you incurring more interest.
  • After considering the above decide whether you can afford the loan. Under no circumstances should you take on repayments that you cannot afford. Consider saving for a deposit if you cannot afford the full monthly repayment comfortably.

Remember: if you save and pay cash the item will cost you less as you save on finance charges, which can double the cost of an article. Cash discounts may also reduce the cost.

Plan your debt

One of the golden rules of good money management is to ensure that you are not paying for something you no longer have or use. It is also wise to try and limit your credit purchases to assets. This means you should ideally not be buying clothes and food on credit but rather use it for appliances and assets with a longer lifetime. The reality is that it is not always possible but when you do buy consumables on credit you should strive to pay these amounts as soon as possible.

Limit the temptation

Try to keep the credit limits on your credit card and overdraft low and only increase them when you really need to. Having a high credit limit makes it easy for you to overextend yourself.

It also helps to not have lots sources of short-term debt. Rather use a single source such as your overdraft or credit card. It allows you to keep track of your expenses on a single statement.

If you choose a facility, for example, a personal loan, to consolidate your debt, make sure that you do not reopen the accounts you have paid in full. This makes managing your money simpler.

Balance debt and savings

Generally, the interest you pay on debt is more than that you earn on savings. This is one of the reasons many people put their extra cash into their loans. They decrease the amount of interest they would pay on their loan by more than the interest they are likely to earn in another savings or investment vehicle.

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