Installment debt, in itself, is not a bad thing. It enables us to make major purchases that would be nearly impossible to finance up-front. The problem is, in this consumer society, we’re bombarded with advertisements for literally thousands of “must-have” products. The result is that while our parents tended to pay with cash and buy only what they could afford, we have the “buy now, pay later” mentality.

Unfortunately, our massive appetite for credit may be eroding our financial security, as more Americans continue to rely on borrowed money to maintain their existing lifestyles.

Why Credit Is Important

It is important to establish credit if you plan to buy a home or automobile some day. Credit cards also provide a means of reserving a hotel room or obtaining cash while you’re traveling.

If you are a college student, recent graduate, or a nonworking spouse, you can begin to establish credit by opening a savings or checking account in your own name. You can then apply for a department store and/or oil company credit card. Having someone else co-sign a loan for you will also get you started.

Creating a positive credit history for yourself requires using your credit card intelligently. Following are some dos and don’ts to help you manage credit effectively:

• DO NOT charge more than you can easily pay off in a month or two.
• DO NOT be fooled into paying just the low minimum amount listed on a bill. Credit card issuers make money on interest; there’s nothing they’d like more than to have you stretch out payments.
• DO consistently pay your bills by the due date.
• DO use credit for larger, durable purchases you really need, rather than non-durables, such as restaurant meals that are better paid in cash.

Missing Payments

When you miss a payment, the information immediately goes into your credit report and affects your credit rating. If you’re judged a poor credit risk, you may be refused a home mortgage or rejected for an apartment rental. In addition, a prospective employer looking for clues to your character may dismiss your job application if your credit report reflects an inability to manage your finances. In most states, an auto insurer may put you into its high-risk group and charge you 50% to 100% more if your credit record has been seriously blemished within the last five years. Many property insurers also review credit histories before they issue policies.

How Credit Reporting Works

Credit reporting agencies, also known as credit bureaus, gather detailed information about how consumers use credit. Businesses that grant credit regularly supply credit information to credit bureaus. Credit bureaus then compile this information into credit reports, which are sold to banks, credit card companies, retailers, and others who grant credit.

Your credit report helps others decide if you are a good credit risk. This information should be supplied only to those parties who have a legitimate interest in your credit affairs, including prospective employers, landlords, or insurance underwriters, as well as others who grant credit. The Fair Credit Reporting Act (FCRA), the federal statute that regulates credit bureaus, requires anyone who acquires your credit report to use it in a confidential manner.

The following information is most likely to appear in your credit report:

• Your name, address, social security number, and marital status. Your employer’s name and address, and an estimate of your income may also be included.
• A list of parties who have requested your credit history in the last six months.
• A list of the charge cards and mortgages you have, how long you’ve had them, and their repayment terms.
• The maximum you’re allowed to charge on each account; what you currently owe and when you last paid; how much is paid by the due date; the latest you’ve ever paid; and how many times you’ve been delinquent.
• Past accounts, paid in full, but are now closed.
• Repossessions, charge-offs for bills never paid, liens, bankruptcies, foreclosures, and court judgments against you for money owed.
• Who owes the debt — you alone, you and a joint borrower, or you as cosigner. (Debts that you co-sign become part of your credit history, the same as debts you incur yourself.)
• Bill disputes.
  Negative information can be kept in your file only for a limited time. Under the law, delinquent payments can be reported for no more than 7 years and bankruptcies for no longer than 10 years.

Be Credit-Smart

Your credit history requires maintenance, just like other areas of your life. Even if you pay your debts on time, don’t assume that your credit rating is flawless. Mistakes do occur.

The FCRA entitles you to review information in your credit file. If you have been denied credit, the company denying credit must let you know and give you the name and address of the credit agency making the report. Once you have this information, you can send a letter to the agency and you will receive the information in your credit file, at no cost, within 30 days.

It’s a good idea to obtain a copy of your credit report to check it for accuracy. A new law entitles all consumers in the United States to one free online credit report every 12 months from each credit reporting agency. To do so, log on to annualcreditreport.com. (Keep in mind that other Web sites claiming to offer “free” credit reports may charge you for another product or service if you accept a “free” report.) If you wish to dispute any information in your file, simply write the agency and ask them to verify it. Under the law, they are required to do so within a “reasonable time,” usually 30 days. If the agency cannot verify the information, it must be deleted from your file.

Points to Remember

1. Installment credit, in itself, is not a bad thing; it can enable you to make major purchases that would otherwise be difficult to finance.
2. To establish a credit history, open a checking or savings account, then apply for an oil company or retail store credit card. Use your cards sparingly, charging only what you can pay off in a month or two, and make your payments by the due date.
3. Don’t be fooled into paying just the minimum balances. If you do, you’ll stretch your payments over months, even years, and incur interest charges in the process.
4. Missed or late payments will damage your credit rating, which can affect your ability to obtain a home mortgage or rental apartment, auto or property insurance, and maybe even a job.
5. Monitor your credit rating periodically to determine that all information is reported accurately.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

April 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Martin V. Higgins, CFP, CLU, AEP, a local member of FPA.

What is it?

Marriage is an important step in anyone’s life and brings many challenges with it. One of those challenges is the management of your finances as a couple. The money decisions that you make now as a couple can have a lasting impact on your financial future together. Careful planning of your finances can ensure that together, you achieve financial success.

Budgeting your money

In general

When you were single, you managed your finances in a way that was comfortable for you and that you understood–no one had to approve or disapprove of your financial decisions. Now that you are married, however, both you and your spouse have to agree on a system for budgeting your money and paying your bills.

Discuss financial situations

You and your spouse must discuss your respective financial situations and expectations, and take stock of your individual assets (what you own) and liabilities (what you owe). Revealing your financial situation is an important step when budgeting as a couple. If either of you has a financial problem, it is best to identify it now and begin solving it together. This is the time to address questions such as what do each of you earn, and what additional sources of income do you have? What do you own? Will both of you work now that you are married? Who will hold title to property acquired before and after the wedding? In addition, be sure to disclose all of your financial commitments. If you pay child support, let your partner know the amounts. If you have to repay student loans, discuss that as well.

The worksheets that follow will assist you in determining your current financial situation.

After you discuss your financial situations, you should discuss your financial goals. You can start by each making a list of your short- and long-term financial goals. Short-term goals are those that can take anywhere from three to five years (e.g., saving for a down payment on a home or a new car). Long-term goals are those that take more than five years to achieve (e.g., saving for a child’s college education or retirement). When you have each determined your individual financial goals, you should review your goals together to achieve common objectives. You can then focus your energy on those common objectives and strive to attain those goals (short- and long-term) together.

Decide on the type of bank account(s) you will keep

Decide whether you and your spouse will have separate bank accounts or a joint account. Advantages to consolidating your checking funds into one account include easier record-keeping, reduced maintenance fees, less paperwork when you apply for a loan, and simplified money management. If you do choose to keep separate accounts, consider opening a joint checking account for household expenses.

Caution: When sharing a checking account, be sure to keep track of how much money is in the account at all times since both of you will be writing checks that draw from the same account.

Prepare an annual budget

The first step in developing a financial future together as a couple is to prepare an annual budget. The budget will be a detailed listing of all your income and expenses over the period of a year. You may want to designate one spouse to be in charge of managing the budget, or you can take turns keeping records and paying bills.

Tip: Make sure that you develop a record-keeping system that both you and your spouse understand. Also, keep your records in a joint filing system so that you can easily locate important documents.

• Begin with your sources of income–list salaries and wages, alimony and child support, interest, and any other form of income that you and your spouse may have.
• List your expenses. It may be helpful to review several months’ worth of entries in each of your checkbooks to be sure that you include everything. Put all the expenses that are paid monthly into one category, and put all other expenses (every other month, quarterly, semiannually, annually) into another. Some common expenses are:

Savings	Major purchases
Rent or mortgage payments	Insurance
Student loan payments	Car repairs
Groceries	Clothing
Pet care	Tax payments
Utilities	Medical expenses
Car payments	Gifts
Credit card payments	Automobile gas
Alimony/child support	Child day care
Household items	Entertainment/dining out
Personal care/grooming

• Estimate your expenses for each category. How much money do you spend on these items on a monthly basis and on an annual basis? Try to come up with a realistic amount for what you think you will spend in a year’s time. Add another category to the irregular expenses list, and call it Contingencies. This can be a catchall category for expenses that you might not anticipate or budget for. The amount to budget for contingencies should be about 5 percent of your total budget.
• Add your sources of cash and uses of cash on an annual basis. Hopefully, you get a positive number, meaning that you are spending less than you are earning. If not, review your expense list to determine where you can cut your spending. Consider using computer spreadsheets or programs like Quicken for assistance.

Create a cash flow system

After you have developed a budget, you should create a system for managing your monthly inflow and outflow of cash. It is a good idea for both you and your spouse to become involved in this process–at least at first–so that both of you have a clear understanding of the costs of running the family and household.

Cash flow systems like the one described below are simple and painless to operate. Once they are established, you will find that making financial decisions becomes much easier because you have done your homework.

• Separate your regular monthly expenses from irregular expenses (every other month, quarterly, semiannually, annually) by using a different bank account for each. Otherwise, you may be tempted to use money that has been earmarked for something else. You should limit the number of checking accounts that you have in order to avoid confusion.
• Each time you get paid, deposit some money into an account for irregular expenses. The amount of money you deposit should be equal to the total amount needed for the irregular expenses, divided by the number of paychecks you each receive annually. In so doing, you will have the money for the outlay when it arises. The rest of your pay should go into your checking account, to be used for regular monthly expenses and savings.
• One variation to this system of cash flow management is to establish one or two additional bank accounts for one or both of you for personal spending money. Allocate the budgeted amount for personal expenses (e.g., lunches, haircuts, gifts) to this account. This way, you are free to spend the money in this account in any way you like without having to worry about meeting regular monthly expenses. However, all of these bank accounts may have fees.

Saving and investing your money

In general

At some point in your married life, you will almost certainly encounter some large expenditures, such as a new home, your own business, or a college education for your children. Chances are, you won’t be able to meet these expenditures from your current income. You and your spouse must discipline yourselves to set aside a portion of your current income for saving and investing your money to ensure its steady growth or, at the very least, protect it against loss.

Save a percentage of your earnings

When figuring out your budget, savings should be considered one of your monthly expenses. Think of savings as a fixed payment (like a car payment) that must be made every month. If you don’t and you wait until the end of the month to save whatever you have not spent, you’ll find that nothing ever seems to go into your savings account. A good rule of thumb is for you and your spouse to save 4 to 9 percent of your combined gross earnings while you are in your 20s and then double that savings percentage as you reach your 30s and 40s. In some cases, a dual-income couple may be able to live off one spouse’s salary and save the other salary.

Example(s): Mary and Richard, a married couple in their 20s, earn a combined annual gross income of $60,000. Together, Mary and Richard save 5 percent of their combined gross income each year, or $3,000.

As another example, Christine and Tom, a married couple in their 30s, earn a combined annual gross income of $80,000. Together, Christine and Tom save 10 percent of their combined gross income each year, or $8,000.

Build an emergency cash reserve

The savings that you accumulate can serve as an emergency cash reserve. Ideally, you should have in savings an amount that is comfortable for you to fall back on in case of an emergency, such as a job loss. A common formula used for calculating a safe emergency fund amount is to multiply your total monthly expenses by 6. When determining how much cash should be in your emergency fund, a major factor is your comfort level. If you and your spouse feel secure with your jobs and are confident that if you lost your current jobs you would be able to find a new one fairly quickly, an emergency fund of three times your monthly expenses should be sufficient. However, if either of you has an unpredictable income, you may want to have an emergency fund that is equal to 12 times your monthly expenses.

Example(s): Christine and Tom, a married couple in their 30s, plan to build up an emergency cash reserve. Both Christine and Tom are attorneys and feel quite secure with their present jobs. Christine and Tom have monthly expenses of $3,000 and plan to build up an emergency cash reserve that is equal to 3 times their monthly expenses, or $9,000 ($3,000 x 3).

As another example, Mary and Richard, a married couple in their 20s, plan to build up an emergency cash reserve. Both Mary and Richard are employed as freelance writers and feel that their incomes are at times unpredictable. Mary and Richard have monthly expenses of $1,500 and plan to build up an emergency cash reserve that is equal to 12 times their monthly expenses, or $18,000 ($1,500 x 12).

Investing your money

When you have established an emergency cash reserve, you can begin to invest your money to target your financial goals. There are three fundamental types of investments: cash and cash alternatives, bonds, and equities. Cash and cash alternatives are relatively low-risk investments that can be readily converted into currency, such as money market accounts. Bonds, sometimes called debt instruments, are essentially IOUs; when you invest in a bond, you’re lending money to the bond’s issuer–usually a corporation or governmental body–which pays interest on that loan. Because bonds make regular payments of interest, they are also known as income investments. Equities, or stocks, give you a share of ownership in a company. You have the opportunity to share in the company’s profits and potential growth, which is why they’re often viewed as growth investments. However, equities involve greater risk than either cash or income investments. With equities, there is no guarantee you will receive any income or that your shares will ever increase in value, and you can lose your entire investment. In addition to these three basic types of investments–also known as asset classes–there are so-called alternative investments, such as real estate, commodities, and precious metals.

No matter what your investment goal, your overall objective is to maximize returns without taking on more risk than you can bear. You’ll need to choose investments that are consistent with your financial goals and time horizon. A financial professional can help you construct an investment portfolio that takes these factors into account.

Establishing good credit

In general

Establishing good credit is an important step in the path towards a solid financial future. A good credit history can enable you to make credit purchases for items that you might not otherwise be able to afford. Most creditors will require a good credit history before extending credit to you. If you do not have a credit history, it is important to establish one as soon as possible. If you have a poor credit history, you should take steps toward improving it right away.

Individual or joint credit

Married couples can either apply for credit individually or jointly. One of the benefits of applying for joint credit is that both you and your spouse’s income, expenses, and financial stability are considered when a creditor evaluates your overall financial picture. However, applying for separate credit has its advantages. If you and your spouse ever run into financial problems (e.g., illness or job layoff), separate credit allows one spouse to risk damaging his or her credit history while preserving the other spouse’s good credit. In addition, separate credit can also protect you and your spouse from each other. If you and your spouse cosign a loan or apply for a credit card, you are both responsible for 100 percent repayment of the debt. In other words, if your spouse does not pay his or her share, you can get stuck with paying the whole amount. On the other hand, if your spouse takes out a loan or applies for a credit card on his or her own, generally your spouse is solely responsible for the debt.

Tip: While the general rule is that spouses are not responsible for each other’s debts, there are exceptions. Many states will hold both spouses responsible for a debt incurred by one spouse if the debt constituted a family expense (e.g., child care or groceries). In addition, in some community property states, both spouses may be responsible for one spouse’s debts, since both spouses have equal rights to each other’s incomes. You may want to discuss your state’s laws with an attorney if you live in a community property state.

Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

It’s hard to imagine functioning in today’s society without access to credit. However, you need to be careful not to fall victim to some of the pitfalls associated with it.

Revolving credit can make it hard for you to pay off debt

Credit cards allow you to spend money you don’t currently have, and to repay what you’ve spent over time instead of all at once. When you use a card, the balance you owe increases, and your remaining available credit decreases. As you make your payments to reduce your outstanding balance, your available credit once again increases. Thus, your credit revolves around for you to use again.

Since you can spend more than you currently have, you can easily spend more than you can afford. As your balance increases, your minimum monthly payments also increase, and soon you’ll find yourself in over your head–especially if interest rates and a variety of fees are high.

Interest and fees can add to the cost

Credit card debt generally carries a high interest rate. Your minimum monthly payment–a percentage (often as low as 2 to 4 percent) of the total balance due–may cover little more than the monthly interest charge. Consequently, your minimum payment may only minimally decrease what you already owe. If possible, increase your monthly payment above the minimum required. The higher you can make the payment, the faster you will pay off the debt.

When opening a new account, always check to see how the finance charge is calculated. Here are some of the methods used:

• Adjusted balance method: Balance due at the beginning of the billing cycle less any payments made during the cycle; excludes new purchases made during the cycle
• Previous balance method: Balance due at the beginning of the billing cycle
• Average daily balance method: Total of the balances due each day in the billing cycle divided by the number of days in the cycle; payments made are subtracted as posted to determine daily balances; new purchases may or may not be added in
• Two-cycle average daily balance method: Same as the average daily balance method, but over two consecutive billing cycles

The amount of your finance charge can vary widely from method to method. Because finance charges result in higher interest charges, creditors favor either of the last two methods mentioned above.

In an effort to attract your business, many lenders offer very low introductory rates–3.9 percent annually or less. However, these rates generally last no more than three to six months and increase to the current market rate thereafter. Moreover, the introductory rates may apply only to balances you transfer from other cards. They may not apply to new purchases and rarely if ever to cash advances. Finally, if your monthly payment is late, the interest rate may be automatically raised to the current market rate–and sometimes beyond.

If you have two different interest rates on one account (e.g., a lower rate for purchases, a higher one for cash advances), the creditor will post the payments toward the lower interest rate balance, not the higher. To avoid this, use two different cards if possible–one for purchases you will pay off when the bill comes (thus incurring no interest charge) and the second, lower-rate card if you have to carry a balance.

You may also incur a wide variety of fees. Creditors may charge you an annual fee to maintain the account. These fees can range from $25 to $50 or more each year. They may also charge fees to transfer balances from other cards. Generally, these processing fees equal 2 to 4 percent of the amount you transfer. Many banks levy a similar surcharge on transactions involving conversions from foreign currencies. If you’re late with your monthly payment, you may be charged a late payment fee that can be as much as $39 each month you’re overdue. If your account balance rises above your approved credit limit, you will be assessed a monthly overlimit fee until you bring the total balance due under the limit you’re allowed.

When these fees add up, you may find that making your minimum monthly payment won’t bring your balances down. In fact, your balance will increase if your monthly payment isn’t greater than the accumulated interest and fees due, since these unpaid charges become a part of the principal you owe. Moreover, your account may then be considered past due and reported as such to the credit bureaus.

If you surf your debt, beware the wake

You may periodically transfer your balance from one introductory offer to the next. This is known as surfing. Done successfully, surfing lets you avoid the higher interest charges that your debt would incur when the original card offer expires. By the time the interest rate on the original card increases, you’ve surfed over to a new offer at another low rate.

Although surfing helps keep your interest charges to a minimum, it’s not without pitfalls. You may be offered a low rate only on balance transfers; if new purchases and cash advances are billed at a higher interest rate, these charges could offset the savings you would otherwise enjoy. Moreover, as creditors move to counteract the surfing trend, many stipulate that if you transfer balances to another card within a certain time after opening your account, you’ll be retroactively charged a higher rate of interest on the amount you transfer. Thus, surfing before this time period is up eliminates the savings.

Finally, if you transfer balances to a new card, close the original account as soon as you’ve paid it off. Write the creditor a letter (keep a copy for your records) asking it to inform the credit bureaus that the account was closed at your request. This prevents new potential creditors from denying you credit when they see too many open lines of credit, and it also deters anyone else from fraudulently using an inactive account.

Protect yourself against credit fraud and identity theft

Credit fraud (the illegal use of your accounts) and identity theft (opening new credit using information about you) are two of the fastest-growing crimes today. In many cases, you may not know you’ve been victimized until it’s too late. Here are some indicators of these crimes:

• A creditor informs you that it received an application in your name
• You’ve been approved for or denied credit you didn’t apply for
• You no longer get your credit card statements in the mail
• Your credit card statements include purchases or cash advances you never made

To minimize the chances of being victimized, take precautions to safeguard your credit account information. Don’t carry credit cards you don’t use often. Be sure to sign your cards, and never sign a blank charge slip. When you use the card, try to keep it within your sight. Save your receipts, and obtain and destroy any carbons. Don’t allow a sales clerk to write your credit card number on a check “for identification.” Finally, never give out your account number over the telephone unless you initiated the call and know the organization to be reputable.

April 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins,CFP , a local member of FPA.