Email   Print   Share By 1st Lt. Sara Hanson, Legal Assistance Office

Facebook Digg Delicious May 31, 2012 | News

Managing your personal finances can be a challenging and difficult task. Too often, clients come to the Legal Assistance Office at Fort Hood seeking help after they have made a bad financial decision. The best way to protect your money and yourself is to be prepared and knowledgeable about credit.

Credit is a financial system in which one party, called a creditor or a lender, provides resources to a second party, the debtor or borrower, in return for a deferred payment. When the resources provided are money, goods, or services, this is called consumer credit. Common examples of consumer credit include credit cards and auto loans.

Some lines of credit are secured, which means that the borrower has pledged some asset (usually the subject of the line of credit itself) as security for the loan. The property pledged as security is referred to as collateral. If the borrower fails to pay the money owed, the creditor can take possession of the collateral and may sell it to regain some or all of the amount originally lent to the borrower. A common example of secured debt would be an auto loan. The car itself serves as the collateral for the loan. In the event that the borrower defaults on his car payments, the lender may repossess the car and sell it to recoup some or all of its losses on the original loan. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a judgment against the borrower for the remaining amount.

The opposite of secured debt is unsecured debt. Unsecured debt is not secured by collateral. Therefore, if a borrower defaults on an unsecured debt, a lender must go after the borrower directly to recover. Because of this risk to the creditor, the interest rates charged for unsecured debt are often higher than those charged for secured debts. A common example of unsecured debt is credit card debt.

When you are thinking about purchasing something on credit, you should consider many factors. First and foremost, you should be familiar with your credit report and know your credit score. There are three major credit bureaus that monitor credit in the United States: Experian, Equifax, and TransUnion. Everyone is entitled to one free credit report from each of the big three credit bureaus every year. Access your free credit reports by visiting www.annualcreditreport.com. Note that your credit report will not contain your credit score, which you often must pay extra to obtain. You should check your credit report often to ensure that it is accurate and up to date.

Creditors will check your credit to determine if you are a reliable borrower before they extend you an offer of credit. Once a creditor extends you an offer of credit, it is important that you understand what that offer means. In particular, make sure you understand the annual percentage rate or APR, the total finance charge of the purchase, and the policies for any promotional interest rates.

The APR is the interest rate paid per year on a loan. However, the interest rate will normally be compounded each month, so the amount of interest you end up paying over the life of a loan will end up being much more than a simple percentage of the original loan amount. That is why it is important to also look at your finance charge.

The finance charge is the total of all accrued interest and fees on a line of credit. In other words, the finance charge is the actual cost to you to borrow money. For example, let’s say you finance a new car for $20,000 at a 15 percent APR for 60 months (5 years). The monthly payment on such a loan would be $475.80, and the total payout over the life of the loan would be $28,547.92. At this APR and over this length of time, it would actually cost you $8,547.92 – almost half the cost of the car itself – just to borrow the money. Note that the finance charge adds up to substantially more than merely 15 percent of the original loan amount, or $3,000.00.

Finally, be wary of promotional interest rates. Merchants will often offer very low promotional interest rates in order to make sales, sometimes even offering as low as 0 percent. These promotions can save you a lot of money, but they can also end up costing you a lot too. Such promotions often have penalty interest rates built into the fine print of the contract. Miss even one payment at the low promotional rate, and your interest could skyrocket instantly. In some cases, penalty interest rates can be as high as 30 percent. It’s extremely important that you always read any credit agreement thoroughly before signing it.

The Fort Hood Legal Assistance Office is available as a resource to help guide Soldiers and family members toward a more stable financial future. Feel free to make an appointment to speak with an attorney today if you have questions concerning using and building credit, or if you just want an agreement reviewed before signing it.

Speak to your Command Financial Specialist or visit Army Community Services for more information about financial readiness. Remember, you are your best defense against financial problems.