Having a good understanding of your individual financial situation is key to being able to create your own personal safety net. Knowing where your money goes each month and establishing a savings plan are perhaps the first steps to managing your finances, and can often help you avoid having credit problems or risking bankruptcy. Know your options when it comes to banking and the appropriate steps to take if you're having credit problems or considering bankruptcy.
There are many reasons for opening a bank account, including:
- Saving money. You're less likely to touch your savings if it's in a bank or similar institution.
- Earning interest and watching your money grow.
- Ease of tracking your money and how you spend it.
- What time of day will you do most of your banking? Does the bank offer flexible hours, online banking or telephone banking?
- Are the bank's branch offices or ATMs (Automatic Teller Machines) convenient to your home, office or other locations you frequent often? If you often travel out of town, are there branches in those locations? Generally, if you use another bank's ATM you will pay a fee to that bank and to your own.
- Is the bank insured by the Federal Deposit Insurance Corporate (FDIC)? If so, the FDIC insures up to $250,000 per depositor, per insured bank, for each ownership category.
- Does the bank offer debit cards? Debit cards look like credit cards but operate like a cash withdrawal or a personal check. When you use a debit card to purchase something, the cost of the item is automatically deducted directly from your checking or savings account. The debit card limits you to spending only what is in your account. It is generally accepted where credit cards are, and often can be used at locations that don't accept personal checks. Using a debit card instead of writing checks saves you from showing identification or giving out personal information at the time of the transaction.
- What special services does the bank offer, what are the costs, and are they the services you need? For example, banks may offer overdraft protection, direct deposit, loans and mortgages, retirement services or IRAs, credit cards, brokerage services for stock trading, insurance, and annuities. Determine what services will be of benefit to you, and the costs associated. Keep these and other fees in mind when selecting your bank. Also, it's important to know that while many of the bank's services are FDIC insured, investment products offered through the bank are not FDIC insured and could lose value. The bank is required to tell you what products are not FDIC insured.
While banks may use different names for the accounts, the following types of checking and savings accounts are offered by most financial institutions.
Regular Checking-Generally, this type of account is for the customer who does not maintain a high balance and uses a checking account for paying bills and daily expenses. Some basic accounts may require either direct deposit or a low minimum balance to avoid any fees. Look for a bank that offers a checking account linked to another account. Your savings balance may offset your checking account balance requirement.
Interest-bearing Checking-A simple way to earn interest on the funds you have on deposit. With these accounts, the higher your balance, the more interest you earn. This type of account usually requires a minimum balance to open and an even higher balance to maintain in order to avoid fees. Interest is usually compounded daily on the average daily available balance. If you cannot maintain high minimum balances, avoid these accounts as it may cost you more in fees than the low interest you'll earn on your balance.
Joint Checking-An account owned by two or more people, usually sharing a household and the associated expenses. Each person has equal access to the account. Most accounts, be it checking, savings or money market, allow for joint use.
Express Checking-For people who rarely step inside a bank, these accounts are a good way to get low-priced checking from a large bank. They usually offer unlimited check writing, low minimum balance requirements and low or no monthly fees. The downside to this type of account is that teller fees can be as high as $3 per visit.
No Frills Checking-These "no-frills" accounts are for people who don't write many checks on a monthly basis and cannot meet minimum required balances to avoid regular checking fees. No-frills accounts usually have monthly fees ranging from zero to $6, require low, if any, minimum balance and allot a certain number of checks per month.
Savings-Savings accounts allow you to make withdrawals, but without the flexibility of using checks. The number of withdrawals or transfers you can make on the account each month may be limited. As with other accounts, there may be various fees on savings accounts, such as minimum balance fees.
Money Market-This account combines checking with savings and/or investment opportunities and helps you pursue higher earnings. It requires a high minimum balance to open ($1,000 - $10,000), and higher balances must often be maintained to avoid fees. While you are able to make withdrawals, it is not as convenient as doing so from a checking account and there are limitations on the number of checks you are allowed to write. A money market account is for people who want to put their money where it will earn a market interest rate. These accounts pay more interest than basic checking or savings accounts; however, the interest rates can fluctuate, depending upon market conditions.
Certificates of Deposit (CDs)-CDs, offered by banks, allow you to lock-in an interest rate for a specified period of time (e.g., one year). You choose the length of time, or term, that your money is on deposit, with terms ranging from several days to several years. With most CDs, the longer the term the higher annual percentage yield. Once you choose the term you want, generally you must leave the money in the account until the term ends, known as maturity. Some banks will let you withdraw the interest, while your initial deposit amount (the principal) must remain in the account. If the bank allows you to withdraw your principal funds before maturity, a penalty is usually charged.
Any financial institution you explore will also have questions for you. Be prepared to provide the following:
- A photo ID (driver's license, passport or student ID)
- Your Social Security number
- Address verification. A utility bill with your current address will suffice.
- Your signature on a card or form that will be kept on file by your bank. While some banks will initiate an account over the telephone, they will run a check with a credit agency to verify the information.
Having Credit Problems
Borrowing money can be a necessity in today's economy. When you purchase a home, buy a car or pay college tuition, chances are you're doing it with borrowed money. Banks want to lend to people who have a good track record paying their bills. But if you have large debts that you can't pay on time, you may be headed down the road to serious financial problems.
Your credit record is a permanent one. Skip your bill payments, pay bills late or abuse your credit, and credit companies will enter the information into your credit report, which is available to anyone to whom you apply for credit. Building and preserving a good credit report is essential, and here is information that can help.
Create a budget so you know exactly where all of your money is going. Keep daily records of everything you spend for a month and decide where you can cut or save.
Plan for large purchases such as appliances or a new roof, and large gifts, for birthdays, weddings and holidays. Put a fixed percentage of your income into a savings account each month to pay for such expenses.
Pay yourself first. Deposit a fixed amount each month into a savings account to provide a cushion in the event you lose your job or face an unforeseen emergency. Many experts recommend that you have enough money saved to cover living expenses for up to six months.
Put the brakes on spending. Credit cards can drive impulse purchases, so leave them at home and use them only when necessary. Pay for day-to-day expenses and purchases with cash, a debit card or a check.
Get rid of most of your credit cards, especially if you're juggling monthly payments. Cut or shred the cards, then notify the lenders to close your accounts. Keep just one card for emergencies.
Consider transferring the balances from multiple cards to one new, low-interest card.
Another helpful idea: Pay off the lowest credit card balance first, then add that monthly payment to the payment of the next lowest card. For example: Card A has a balance of $300; card B has $600; and card C has $2,000. You can afford to send $50 per month on each card. When card A is paid off, you apply that $50 to card B, sending in a monthly total of $100 until it is paid off. You then add that $100 to payments to card C, sending in $150 per month until it is paid off.
If you're in over your head and can't afford to keep up payments on your debts, there are a number of strategies that can help to make things more manageable.
First, call your credit card company and ask them to lower your finance charge and annual fee. This may seem like a long shot, but they may agree to your request just to keep you as a customer.
If you really can't pay the bills, call or write the credit card company and explain the problem. They may offer to lower or even freeze payments if you are having a temporary cash flow problem.
Talking through your credit problems with a professional can relieve stress and help you see your way out of trouble. Many employers have an employee assistance program to help you get back on your feet.
The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies - Equifax, Experian, and TransUnion - to provide you with a free copy of your credit report, at your request, once every 12 months. You can order your free annual credit report online at annualcreditreport.com, by calling 1-877-322-8228, or by completing the Annual Credit Report Request Form and mailing it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.*
* Federal Trade Commission, website, http://www.ftc.gov/bcp/menus/consumer/credit/rights.shtm
When you receive your credit report, look it over carefully. Are your name, address and Social Security number correct? Do the lines of credit listed belong to you? If you find errors, notify the credit bureau in writing and include any backup materials such as canceled checks. Although they are supposed to share information, it's a good idea to send a copy of your letter to all the credit agencies.
If your credit problems have progressed to the point where your creditors have turned your case over to collection agencies, it is important to know your legal rights. Collection agencies are not allowed to do the following:
- call your office
- call your home before 8 a.m. or after 9 p.m.
- address you in an abusive manner
- call family or friends in an attempt to collect your debt
Under the Fair Debt Collection Practices Act, debt collectors cannot harass you. If any of the above is happening to you, tell the collection agency to stop harassing you. If it continues, ask for its name and address and report it to the Better Business Bureau, the Federal Trade Commission or your state's attorney general's office.
The sudden loss of a job, medical bills, a divorce or even a natural disaster can quickly wipe out a life's savings putting average working families, who try to pay all of their bills, in financial trouble.
Bankruptcy is used as a last resort, after other attempts to solve a financial crisis fail. The decision to file bankruptcy should be carefully considered. It is a federal court proceeding that can affect your legal right to keep or to use your property. Once you start a bankruptcy case, it may be impossible to stop. You may want to talk with a credit counselor or an attorney to see if you really need to file bankruptcy, or if an agreement can be reached with your creditors.
There are many types of bankruptcy. A few of the most common are described below.
In Chapter 7 bankruptcy, your nonexempt property may be sold by an appointed trustee, who then makes partial payments to your creditors. You have the right to retain at least a partial interest in certain assets, such as your residence, car, clothing, household appliances and furnishings, life insurance, pensions and tools of your trade. In most cases, you may not have to give up any of your personal property. You may have a choice of either the exemptions provided for in the Bankruptcy Code or those allowed under your state law, whichever is most beneficial. Secured creditors do retain rights against any collateral you have pledged to secure a loan.
The first step in bankruptcy is to file a petition and schedules at the clerk's office of the federal bankruptcy court. You can obtain the appropriate forms from the court clerk. Your petition must include a list of all creditors, the sources of your income, a list of all real and personal property, and a detailed list of your living expenses. Additionally, you will need to pay a filing fee. A few courts may waive the fee if you are impoverished. Some of the documents you will need include the following.
- Deeds, mortgages, contracts on your home and mortgage statements.
- Any papers relating to past bankruptcies.
- Copies of tax returns for the past two years.
- All legal papers, summonses, complaints and notices of attachment, execution or garnishment.
- Credit card bills, medical bills and any other documents regarding outstanding debt.
- Statements and passbooks for savings or checking accounts for the past year.
- Student loan papers.
In all but the most basic of cases, it may be advisable to hire an attorney. Fees may range from $400 to $1,000 or more, depending on the complexity of your case. Be sure to discuss attorney fees up front and ask whether you can pay in installments.
In a straightforward proceeding, the entire procedure may take four to six months. You can file for Chapter 7 bankruptcy only once every six years, and notice of the filing may remain on your credit report for up to 10 years. Also note that although your debt may be discharged, anyone who has co-signed a loan with you will remain responsible even after your bankruptcy.
Chapter 11 bankruptcy is generally used to reorganize a business, although individuals are also eligible. This type of bankruptcy allows a business to continue operating while repaying creditors through a court-approved plan.
If you have a regular income, Chapter 13 bankruptcy provides a method for repaying your debt over a period of time, according to a court-approved plan. The period of time allowed ranges from three to five years. Generally, only an individual with unsecured debts of less than $270,000 and secured debts of less than $800,000 is eligible.
To file Chapter 13, you must file the appropriate schedules and petitions with the bankruptcy court and pay a filing fee. You must also file a proposed plan of repayment with your original petition or within the next 15 days.
A trustee will be appointed to supervise your performance, to make regular payments to your creditors and to provide the court and other parties with information about your finances.
Certain debts cannot be discharged through a bankruptcy proceeding. These include certain taxes, alimony and child support, student loans and some property settlements. Other nondischargeable debts result from fraud, willful or malicious injury, certain fines or penalties, and claims incurred from driving under the influence of alcohol or drugs.
A bankruptcy filing can stay on your credit record for up to 10 years, but it need not be a permanent handicap. In fact, there are laws that forbid discrimination against persons who have declared bankruptcy. For example, you may not be denied a job, be denied or evicted from public housing or be denied a drivers license just because you filed for bankruptcy.
Bankruptcy has tarnished your credit report, but it is still possible to gain renewed confidence from creditors. You can typically obtain credit if you demonstrate a consistent employment record and signs of financial rehabilitation. Start by opening a savings account and obtaining a secured credit card. Make the payments on time to build a positive credit profile.
During your rebuilding period, it's important to check your credit rating often to make sure it's improving with your good deeds. For information on receiving and reviewing your credit report see "Review Your File" under Having Credit Problems, above.
For More Information
Federal Deposit Insurance Corporation (FDIC)
The FDIC offers tips for protecting your bank accounts and money, and education on important financial issues and topics.
National Foundation for Credit Counseling (NFCC)
The NFCC offers counseling and educational services to consumers in debt. For free and affordable confidential advice through a reputable NFCC member, call 1-800-388-2227.
The American Bankruptcy Institute
The ABI Consumer Bankruptcy Center answers consumers' FAQ, and provides in-depth information on the bankruptcy process.
Annual Credit Report
This central site allows you to request a free report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.
Internal Revenue Service
The IRS has a very helpful, user-friendly site. Visit it for answers to your bankruptcy and related tax questions.
The quarterly Consumer Information Center catalog lists more than 200 helpful federal publications. For your free copy, call 1-888-8-PUEBLO or find the catalog online at www.pueblo.gsa.gov.