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Having good credit and avoiding debt are goals we all have, but which most of us find hard to maintain on an ongoing basis.
What follows are some common sense principles of good personal financial management which will help you guard against the accumulation of oppressive debt and the loss of good credit.
Live Within Your Means
This is a well known cliché but true nonetheless. It is a common occurrence for returning students to have difficulty adjusting to the loss of income from full time jobs. Some students resort to credit cards to make up for support they no longer get from parents. Remember, it is impossible to get into debt if you do not spend more than you have saved and earned.
Prioritize Your Expenses
Effective budgeting doesn’t mean you can’t spend any money on yourself, any more than being on a diet means you can’t eat. A budget does the following:
- lets you see where your money is coming from and where it needs to go.
- makes you aware of the bills you can’t ignore (rent, utilities, tuition, car payments) without immediate negative consequences.
- helps you plan for longer term goals like buying a car, taking a vacation, etc.
Once you know how much money needs to go for essentials, it becomes easier to determine how much discretionary income, if any, is available to save or spend. Sometimes this process forces you to confront difficult realities, for example, that you can’t afford to keep your car in operation, and need to sell it or put it in storage.
Having a budget also allows you to talk more knowledgeably to creditors if you do experience payment problems. A creditor who has no communication with a debtor will assume the worst and more quickly resort to standard collection practices.
Be an Informed and Cautious Consumer
Many of the worst decisions that affect credit are purchases made on impulse. Impulse doesn’t distinguish wants from needs, or worry whether the goods or services purchased are overpriced or of inferior quality. The bigger the purchase, the more time and thought should be put into the decision to buy or not to buy. Comparison shopping has the double virtue of allowing you to find out where the best price is, and time to reflect on whether you really need or can afford the item you’re considering buying. A myriad of websites and printed consumer guides (Consumer Reports magazine just being one of many) will allow you to comparison shop even before you hit the mall.
The Right to Return Goods or Cancel a Sale
Some people mistakenly believe that the law guarantees the buyer a “grace period” to cancel a purchase after completing a transaction. THIS IS NOT TRUE. The only exception is the circumstance where an unsolicited salesperson comes to your door, in which case you have 72 hours to cancel the sale, measured from the time you were given notice of the right to cancel. Many stores have lenient return practices, but this is policy borne of a desire to develop customer loyalty, not a legal duty. It is a different matter if the goods are defective, or are not fit for the purpose you intended. (You buy a lock mechanism which the salesperson assures you will fit your door but doesn’t.) In these circumstances, you have a right to return the merchandise and receive a refund. The legal principles involved are the “Warranty of Merchantability,” and the “Warranty of Fitness for a Particular Purpose.”
Keep Track of Bills and Monthly Statements
You can’t budget if you don’t know how much you already owe. There are all sorts of planners and other aids available to help you keep track of your bills, and avoid late charges and other penalties. Authorizing automatic deductions from your paycheck can be a relatively painless way of insuring that essential bills are paid on time, but watch out for internet, cell phone, cable and other companies who are hard or impossible to contact when you want to cancel your service, or check the status of your account.
Be Prudent in Assuming Someone Else's Debts
It is hard enough for college students with limited earnings to manage their own finances, much less assume responsibility for someone else’s debt. Examples of hazardous decisions include lending large sums of money to friends, buying multiple cell phones for use by family members, covering a roommate’s rent and share of utilities for a protracted period, creating a joint checking account with your boy friend or girl friend, or authorizing use of your credit card by someone else. If you do decide to lend money this way, make sure you have the other person sign a written statement acknowledging his or her debt to you, and promising to repay you according to a specified plan agreed to by both parties.
Don't Drive Without Automobile Insurance
A good way to become indebted big time overnight is to drive without insurance. For starters, this is a violation of the Illinois Mandatory Insurance Law, which subjects you to a mandatory $500 fine and a two (2) month suspension of your driving privileges if convicted. It also requires you to purchase ultra-expensive insurance, called SR-22, to keep from having your driving privileges suspended.
If you get into an accident and don’t have insurance, things are even worse, since you can be held liable for the other party’s damages if you caused the accident, and you may not be reimbursed for damages to your vehicle even if the other party is at fault, for example, if the other driver doesn’t have insurance either. If this isn’t bad enough, you are also subject to having your driving privileges suspended for two years or longer if the Secretary of State concludes there is evidence you caused the accident.
"Liability” insurance covers damages you cause to the other driver; this kind of insurance is mandatory in Illinois. “Comprehensive” insurance covers damages to your car. It is not mandatory under Illinois law but is highly recommended, since it protects your investment.
If you cannot afford automobile insurance, this is an indication you probably do not have sufficient income to afford a car.
Submit Medical and Auto Insurance Claims Promptly
Having medical insurance and/or auto insurance doesn’t help much if you fail to make a claim when you are sick or injured. Failure to submit a claim promptly makes it more likely you will get “dunned” for the bill, and, at worst, can jeopardize your ability to be reimbursed. Always start a file and keep a copy of all pertinent bills, correspondence, requests for information, diagnoses, claims adjustors estimates, etc. This will guarantee you have the information you need to insure your claim is processed in a timely fashion.
Pay Your Bills on Time and Balance Your Checkbook
Some times you can be nitpicked into debt. Most creditors you do business with will enforce some sort of penalty for late payment of the debt. Banks do this, mortgage companies, auto financing companies, movie rental companies, landlords, even libraries. Other creditors simply assess interest charges on unpaid balances. These “compound” meaning the interest due is added onto the principal, which makes for a higher principal the next month, and consequently, more interest due, and so on. It is not at all uncommon for a debt of say $1200 to a credit card company to become a $1500 or $1600 debt a year later, solely based on ongoing interest charges. Bank overdrafts take an even quicker toll, and subject you to double penalties, one imposed by the merchant where the check bounced, and the other your bank for writing the overdraft.
Writing checks without balancing your checkbook is a little like driving a car blindfolded: you don’t know exactly when you’re going to crash, but it’s a virtual certainty you will. Of course, you can’t pay your bills if you don’t keep track of them. Get some sort of container---a drawer, a bin, a folder---so you can keep your bills together until payday.
It’s a good idea to establish a routine for bill-paying, for example, every payday night. This will also help to get you into a habit of reviewing your bills for accuracy, and allows you to reconsider the benefits of continuing forward in contractual relationships which may not serve your needs anymore, for example, membership in an athletic club you no longer attend, subscriptions for magazines you no longer read, etc. In many instances, you will not be able to cancel the contract immediately, but there are often provisions for allowing you to shorten the period left on your contract.
Pursue Your Legal Rights in Collecting Monies Owed to You
Often indebtedness arises or is made worse because the debtor is not being paid monies owed to the debtor by someone else. This could be an employer who never paid you your last week’s wages, a landlord who didn’t return your security deposit, or a friend who hasn’t paid you back for monies you lent him or her.
Remember, debt is a matter of cash flow. If someone owes you money, find out what legal recourse is available to you to help you get your money.