Remember the definition of net worth (wealth)?

Assets – Liabilities = Net Worth
Liabilities are your debts. Debt reduces net worth. Plus, the interest you pay on debt, including credit card debt, is money that cannot be saved or invested—it’s just gone. Debt is a tool to be used wisely for such things as buying a house. If not used wisely, debt can easily get out of hand. For example, putting day-to-day expenses—like groceries or utility bills—on a credit card and not paying off the balance monthly can lead to debt overload.

Why people get into trouble with debt

Lots of people are mired in debt. In some cases, they could not control the causes of their debt. However, in some instances they could have. Many people get into serious debt because they:

• Experienced financial stresses caused by unemployment, medical bills or divorce.
• Could not control spending, did not plan for the future and did not save money.
• Lacked knowledge of financial and credit matters.

Tips for Controlling Debt

• Develop a budget and stick to it.
• Save money so you’re prepared for unforeseen circumstances. You should have at least three to six months of living expenses stashed in your rainy day savings account, because as the poet Longfellow put it, “Into each life some rain must fall.”
• When faced with a choice of financing a purchase, it may be a better financial decision to choose a less expensive model of the same product and save or invest the difference.
• Pay off credit card balances monthly.
• If you must borrow, learn everything about the loan, including interest rate, fees and penalties for late payments or early repayment

Speaking of interest
When you take out a loan, you repay the principal, which is the amount borrowed, plus interest, the amount charged for lending you the money. The interest on your monthly balance is a good example of compound interest that you pay. The interest is added to your bill, and the next month interest is charged on that amount and on the outstanding balance. The bottom line on interest is that those who know about interest earn it; those who don’t, pay it.

Avoid credit card debt
Planners rarely use credit cards. When they do, they pay off their balances every month. When a credit card balance is not paid off monthly, it means paying interest—often 20 percent or more a year—on everything purchased. So think of credit card debt as a high-interest loan. Do you need to reduce your credit card debt? Here are some suggestions.

• Pay cash.
• Set a monthly limit on charging, and keep a written record so you don’t exceed that amount.
• Limit the number of credit cards you have. Cut up all but one of your cards. Stash that one out of sight, and use it only in emergencies.
• Choose the card with the lowest interest rate and no (or very low) annual fee. But beware of low introductory interest rates offered by mail. These rates often skyrocket after the first few months.
• Don’t apply for credit cards to get a free gift or a discount on a purchase.
• Steer clear of blank checks that financial services companies send you. These checks are cash advances that may carry a higher interest rate than typical charges.
• Pay bills on time to avoid late charges or increased interest rates.

Know what creditors say about you

Those who have used credit will have a credit report that shows everything about their payment history, including late payments. The information in your credit report is used to create your credit score. A credit score is a number generated by a statistical model that objectively predicts the likelihood that you will repay on time. Banks, insurance companies, potential landlords and other lenders use credit scores. Credit scores range from under 500 to 800 and above and are determined by payment history, the amount of outstanding debt, length of your credit history, recent inquiries on your credit report and the types of credit in use. Factors not considered in a credit score include age, race or ethnicity, income, job, marital status, education, length of time at your current address, and whether you own or rent your home.

What’s on YOUR Credit Report?
Consumers have the right to receive annually a free copy of their credit report from each of the three major credit reporting companies:

Equifax: 1-800-685-1111; www.equifax.com
Experian: 1-800-397-3742; www.experian.com
Trans Union: 1-800-888-4213; www.transunion.com

The three nationwide consumer credit reporting companies have set up a toll-free telephone number and one central web site for ordering free reports:
1-877-322-8228; www.annualcreditreport.com

A credit report that includes late payments, delinquencies or defaults will result in a low credit score and could mean not getting a loan or having to pay a much higher interest rate. The higher your score, the less risk you represent to the lender. Review your credit report at least once a year to make sure all information is accurate. If you find an error, the Fair Credit Reporting Act requires credit reporting companies and those reporting information to them to correct the mistake.

To start the process of fixing an error:

• Contact the credit reporting company online, by fax or certified letter, identifying the creditor you have a dispute with and the nature of the error.
• Send the credit reporting company verifiable information, such as canceled checks or receipts, supporting your complaint.
• The credit reporting company must investigate your complaint within 30 days and get back to you with its results.
• Contact the creditor if the credit reporting company investigation does not result in correction of the error. When you resolve the dispute, ask the creditor to send the credit reporting company a correction. If the issue remains unresolved, you have the right to explain in a statement that will go on your credit report. For example, if you did not pay a car repair bill because the mechanic didn’t fix the problem, the unpaid bill may show up on your credit report, but so will your explanation.

Keep your good name
Every month, go back to your budget and plan carefully to ensure your bills are paid before their due dates. Makes sure you pay your bills on time. You may want to have your paycheck set up for direct deposit so you don’t have to scramble to get to the bank on payday. For example, if you get paid twice a month. Using your first paycheck pay your mortgage or rent (set up on auto debit), cable TV and utility bills. From the second check make your car payment (also on auto debit) and have a monthly deposit automatically made to your savings account. Many find that “autopilot” really simplifies budgeting and saving.

DIRECT DEPOSIT & YOU

Many people who receive federal benefits checks, such as Social Security, Supplemental Security Income, Veterans Affairs or other government checks, enroll in direct deposit. Not only is it safer (no direct deposit has ever been stolen), it is far more convenient, and it gives you more control over your money than a mailed check. Call the toll-free Go Direct helpline at (800) 333-1795or (800) 333-1792 en Español, or go to www.GoDirect.org for more information and other sign-up options.

ELECTRONIC TRANSFER ACCOUNT
For a low-cost option for direct deposit, consider an ETA account. The Electronic Transfer Account, or ETASM, allows you to have your federal benefit, wage, salary and retirement payments deposited directly into your bank account—automatically, electronically and safely. Open a low-cost ETA at a federally insured bank, credit union, or savings and loan. Financial institutions offering the ETA have decals in their windows or lobbies identifying them as certified ETA providers. To find an ETA provider in your area, visit the ETA web site, www.eta-find.gov, or call toll-free, (888) 382-3311.

If you believe you are too deep in debt:

• Discuss your options with your creditors before you miss a payment.
• Seek expert help, such as Consumer Credit Counseling Services, listed in your local telephone directory.
• Avoid “credit repair” companies that charge a fee. Many of these are scams.

Save money by choosing the right loan
If you have good credit, you may want to take out a loan to purchase a house or to cover educational expenses—both are investments in the future. But regardless of how the money is spent, a loan is a liability, or debt, and decreases your wealth. So choose loans carefully. Shop and negotiate for the lowest interest rate. The interest you save can be invested to build wealth. Banks charge varying interest rates over the term of the loan. Your credit score may determine which interest rate you are offered. Use an online auto loan calculator to compare rates.

Save money by paying loans off early
You can save interest expense by increasing your monthly payments or choosing a shorter payment term on your loan. For example, a planner, knows a new car would cost more than the sticker price because you would have to pay interest on the loan from the bank. After checking options, it’s wise to choose a shorter payment term with higher payments. Budget enough money each month to make the higher payments. By doing this, you will reduce the amount of interest you ultimately pay. Avoid the trap of getting “upside down”—owing more on the car than it is worth when you sell or trade it in. You could have your car paid for in three years and plan on driving it for at least eight years. Once your car is paid for, you can continue to budget for the car payment but will invest the money to further build your wealth.

Take steps to control your debt
As you can see, a big part of building wealth is making wise choices about debt. You need to maximize assets and minimize liabilities to maximize net worth. To manage debt, you need to know how much you have and develop strategies to control it.

If you want to reduce credit card debts, analyze the debt and develop a strategy. List the balance, interest rate and monthly interest on each of your credit cards, check your credit score and shop for the best rate on a new credit card. Then he transfers all balances to that new card. Cut up the old credit cards and use the interest saved to pay toward the principal balance. Use the new card only for emergencies.

Protect Your Wealth

It is unwise to be too sure of one’s own wisdom. It is healthy to be reminded that the strongest might weaken and the wisest might err.
Mahatma Gandhi

Working hard to create personal wealth, you need to protect it. People acquire insurance to protect themselves from major financial loss. Insurance is simply a promise of reimbursement for a loss in return for a premium paid. When shopping for insurance products, consumers should match their needs with what the product offers and seek out the best deal. A solid credit history is also important because insurers use credit information to price homeowners’ insurance policies. You can buy insurance to cover all kinds of risks, but basic needs can be met with property, health and life insurance.