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CREDIT AND BANKRUPTCY LAW

What is credit and why is it so important?

Credit refers to your ability to borrow money and then pay it back over a period of time. It also refers to how trustworthy a person is considered to be in terms of whether he or she will be eligible for loans and be able to pay off loans. Credit is important because most people cannot afford to pay cash for large purchases, such as houses and cars. You need good credit in order to receive financing in order to obtain a loan to make large purchases.

Why is credit expensive?

Credit can be expensive because lenders or creditors do not lend $5,000 and then simply ask for $5,000 back in return. Rather, they charge you—the debtor—for the extension of credit. You have to pay interest—often called finance charges—as you pay back the loan amount. If you miss payments, then you will have to pay even more money in order to pay off your debt. Consumer credit has risen to nearly $3 trillion dollars, as many people regularly spend beyond their means.

What is APR?

APR stands for annual percentage rate and constitutes the yearly cost of credit expressed in terms of interest. APRs are important when considering a credit card application. APRs can range from six percent to as high as 30 percent or more, so you must be sure to make payments in a timely fashion or the creditors will raise the APR.

Are there different types of credit?

Yes, sometimes a loan agreement requires that the debtor pay off the full balance within a certain amount of time. Other credit arrangements are referred to as opened credit, which is a revolving door type of credit. The debtor must make regular payments and has a credit limit, but must make payments in a timely fashion or risk additional charges. Most credit cards involve this type of revolving credit.

How do you know if you have too much debt?

If you only can make minimum payments on credit cards, that is a sign that you have more debt than you can handle. If you have to use your credit cards regularly for items—such as groceries and meals—that you used to pay in cash, that could be another telltale sign that you are carrying too much debt. If you have exhausted your savings to pay for normal living expenses, that is another possible warning sign that you have too much debt. Another warning sign is if you are regularly making late payments. Those will be reported and result in a lower credit score.

What should you do if you have too much debt?

First, you might try to lower your use of credit cards and cut down all luxury or nonnecessity purchases. You then should consider developing a budget. Most people do not realize that they live beyond their means or how much they currently live beyond their means. A good budget plan can be a real eye-opener.

Additionally, you might consider contacting several of your creditors to see if you can reduce the annual percentage rates (APR) that are burdening you with excess interest. You might also consider speaking with an attorney well-versed in credit, debt, and bankruptcy law to see what are your available options.

Medical bills, credit cards, school loans and more have increasingly burdened American consumers. If you can only manage paying the minimum on your bills, or not even that much, you may have a serious debt problem (iStock).

Medical bills, credit cards, school loans and more have increasingly burdened American consumers. If you can only manage paying the minimum on your bills, or not even that much, you may have a serious debt problem (iStock).

Didn't the U.S. Congress just pass a new law on credit cards?

Yes, Congress passed, and President Barack Obama signed into law, the Credit Card Act of 2009, which is designed to curb abuses in the credit industry and protect consumers. The new law requires credit card companies to give consumers 45 days advance notice about interest rate increases. It also requires consumers to apply payments to the highest-interest rate balances first before applying the payment to a lower-interest rate, balance-interest-free loan.

The new law also requires consumers to "opt-in" in order to be able to make charges that exceed your credit card limit. This change will enable consumers to learn when they are approaching their credit limits.

 
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