Debts and Credit

What is credit?

Credit is when you receive something now, such as goods or services, and promise to pay for it later. Credit cards are a typical example. You can use the credit card to buy something now and pay for it later. Bank loans and mortgages are other examples. The bank loans you money to buy a car or house and you promise to pay them back later. You may also use credit to get services, such as telephone services or household heating. You receive the services all month but don’t pay for them till the end of the month.

What is debt?

Debt is created when you agree to pay for something at some time in the future. If you receive money, goods or services and pay for them later, this will create debt.

What is interest?

Getting something on credit almost always costs more than paying for goods and services when you receive them. This extra money is interest. In some cases, you will not have to pay interest if you pay the debt within a set time.

Interest is usually charged as a percent of the amount you received on credit. People who give you credit must tell you what it is going to cost you to pay later. The cost of credit will be set out in your credit agreement.  It is important to read and understand the terms. If you don’t understand, don’t sign the credit agreement. Have someone you trust explain the documents to you before you decide whether to sign the agreement.

I was looking at a furniture advertisement and it said “no money down and no interest for one year.” What does that mean?

If a store makes this kind of offer they must give you details about what it means. Sometimes it means there is no interest charged at all. However, it could also mean that interest is charged and that this interest needs to be paid once the first year ends.

I had some unexpected expenses this month and I am thinking about getting a pay-day loan. What is this kind of loan going to cost me?

These loans can be quite costly. You could be charged up to $23 for every $100 you borrow. Pay-day loan companies cannot lend you more than half of your take-home pay. The loan cannot be due before your next payday. You must usually sign an agreement that allows the company to take the amount of the loan, plus interest, out of your bank account on your next payday. They can charge up to 30% annual interest if you do not pay the loan back on time.

I missed one loan payment. Now the creditor says I must pay the whole amount of the loan. Can a creditor do that?

They can only do this if your credit agreement says that they can. This is sometimes called an acceleration clause. You will get a written notice about the missed payment. If you do not make the payment within ten days, the creditor can demand the entire amount of the loan.

What happens if I buy on credit or borrow money and I cannot pay it back?

If you cannot pay the creditor back talk to them right away. You could ask to make smaller payments or request more time to pay.  If you don’t reach a new agreement, there are a number of actions that the creditor can take.

They can take back the item you bought (such as a television or a car) if your agreement gives them this right. If the amount you owe is more than what the item is worth, you could still owe them money.

If the agreement does not say that they can demand return of the item, then they have to sue you in court and get a judgment. Once they have a judgment for the unpaid debt, they can do things like take money out of your bank account or sell your property to pay the debt.

I missed some payments and now I am getting repeated calls from a collection agency at all hours of the day and night. Can they do that?

A creditor can hire a collection agency to try to get you to pay. The collection agency can only do things the creditor could do. They cannot take money out of your bank account unless the creditor has sued you and has a judgment. They cannot take back the goods, unless the credit agreement says the creditor can do that. They cannot call on Sundays or holidays or between 9:00 pm and 8:00 am. They cannot contact other people about your debt, but they can contact your employer just to confirm your employment. They cannot ask for more than you owe the creditor.

What does it mean to have a bad credit rating?

Credit agencies collect information about debts. A creditor can report that you did not pay back a loan. They can also report that you did not make your payments on time. This information is available to other people you want credit from. A lender needs your permission before they can do a credit check, but they can refuse to loan you money if you do not allow it.

I checked my credit card statement when it came and there are charges on it for things I did not buy. Am I responsible for paying those charges?

No. The maximum amount the credit card company can charge you for purchases you did not make is $50. Many companies will not charge you anything, if you explain that you did not make the purchases. You should notify the company as soon as possible. If you do not notify the company within 30 days of receiving your statement, you could be responsible for paying the entire amount. If your card is lost or stolen notify the company right away.

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