November 2007

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9 facts you need to know about credit

9 facts you need to know about credit
How to make credit work for you and your practice
By William J. Lynott

Like fire, credit can be a valuable friend or a dreadful foe. Used sensibly, credit can be a major asset in your professional life.

Use it carelessly and it can become your worst enemy.

Here are nine “secrets” that can help put credit to work for you and your practice, not against you.

1 Know the importance of your credit report. If you have ever applied for credit, either business or personal, the three credit reporting agencies (CRAs) — Equifax, Experian, and TransUnion — have compiled a detailed report about you and your credit history.

If your credit score is good, it will be easy for you to get credit when you need it. If your score is bad, you may find it impossible to get credit from anyone.

CRAs are required by law to provide you with a free copy of your credit report, at your request, once every 12 months. You can order your free credit report online at www.annualcreditreport.com, or by calling 877-322-8228.

Once you have established credit in the name of your practice, you may order separate reports for your personal and professional records. While the CRAs will maintain a separate record for your practice, there is a strong likelihood your personal and business files will be cross-referenced. That’s why it is important to follow smart credit practices in both your personal and business transactions.

Most of these tips for the smart use of credit apply equally to your personal and professional credit records.

2 Improve your credit score. A good score for your practice will make it easier for you to obtain credit when you need it and to qualify for business loans at advantageous interest rates. Improve your score by:

• Paying your bills on time. This is the smart way to handle credit. Late or missed payments are a sure way to lower your score.

• Avoiding large credit card balances. Outstanding balances larger than about 25 percent of your credit limit are a red flag to financial institutions.

Unfortunately, transferring balances won’t help. Closing out an account and transferring the balance to another credit card is likely to lower your score. Each time you close an account, you lower your overall credit limit. So, the same amount of debt becomes a larger percentage of your credit limit.

• Reviewing your personal and business reports yearly. Look for accuracy in all three credit bureaus once a year. When you find an error, such as a payment wrongly labeled as late, notify the CRAs of the error and make sure it is corrected.

3 Use other people’s money to make monthly purchases. Whenever possible, don’t charge more than you can pay off in full when your monthly bill arrives.

When you pay the full balance on your credit card bill each month, whether business or personal, you are taking advantage of an interest-free loan from the card issuer. That’s a huge financial advantage.

If you make only the minimum payments on a significant balance, it can take years, and sometimes decades, to pay off the full debt. Once you fall into the “minimum payment trap,” it can be difficult, if not impossible, to dig your way out.

4 Don’t carry a pocketful of credit cards. The more credit cards you have in your wallet or purse, the easier it is for you to spend more money than you can afford.

A pocketful of credit cards, each with a spending limit of several thousand dollars, can sweep you up in the illusion that you have more money than you actually have, and that’s where trouble begins. For most professionals, one business and one personal credit card are all that are necessary. Naturally, all transactions involving your practice should be handled with your business credit card.

5 Don't cancel all of your unused accounts at one time. If you have many credit card accounts, but are only using a few of them, you should close out the unused ones.

However, be sure to keep the cards you’ve had the longest and cancel the newest cards. The agencies that monitor your credit history like to see a long record of prompt payments. Too many new cards will tend to lower your credit score.

If you have more than one or two unused cards, spread the cancellations throughout a period of several months. A rash of card cancellations in quick succession is another red flag for monitoring agencies.

6 Think twice before opening a new account. Once you have separate cards for business and personal use, don’t apply for new ones unless it’s absolutely necessary.

If you don’t already have a long and favorable credit history, opening a new credit line will tend to lower your score, since you don’t have a proven track record. New accounts lower the average age of your accounts, and that, in

7 Forget credit card consolidation. Chances are you’ve seen those advertisements on television and the Internet: “Consolidate all your credit card debts into one low-payment loan.” Some debt consolidation companies also claim they will negotiate with your creditors to reduce your debt.

Debt consolidation comes in several varieties, including debt-consolidation loans, balance transfers to a zero-percent credit card, and home equity loans or lines of credit. “However, these services are not a magic cure for crippling credit card debt,” says Chris Viale, CEO of Cambridge Credit Corp., a nonprofit credit-counseling agency based in Agawam, Mass.

“Once you allow yourself to get into unmanageable debt, there’s no easy way out. Debt consolidation may sound like an easy cure, but many credit card users have discovered that this choice only led them down the road to an even more burdensome debt load,” he explains.

According to Viale, one out of every three or four persons who take out a home equity loan to pay off credit cards finds himself in the same (or higher) debt position after two years. Only now, these individuals have the additional burden of the home equity loan to pay off.

“The first step that anyone with unmanageable debt should take,” says Viale “is to seek professional debt counseling.” The advice is not surprising, since Viale heads a debt-counseling group.

But other professionals agree with him. “Consolidating debts may be only digging yourself into a deeper hole,” says certified financial planner Brent A. Neisner of Greenwood Village, Colo. “Before you take that serious step, you should ask yourself how you got into debt trouble. Overspending almost always involves emotional and psycho-logical issues that aren’t going to go away by treating the symptoms.”

8 Eliminate preapproved credit card offers. Those preapproved credit offers that find their way into your mailbox represent a temptation for identity thieves who might try to open new credit accounts in your name or the name of your practice.

Once they get their hands on such a piece of mail, they can complete the offer by listing a different address. Then they will have an account opened in your name or the name of your practice without your knowledge.

Fortunately, there is a way for you to opt-out of these credit offers. You can opt-out by visiting the official Consumer Credit Reporting Industry Web site at www.optoutprescreen.com, or by calling 888-567-8688 to opt-out via telephone.

9 Understand the difference between debit and credit cards. You have probably been reading and hearing a lot about debit cards lately. Card issuers have been promoting their use for several reasons — few of which work to your advantage.

While debit and credit cards have many similarities, the differences can significantly affect your financial life.

To begin with, it’s easier to qualify for a debit card than a credit card. That’s because no credit is involved. When you use a debit card, you must already have the money in your account at the bank. Your purchase is debited to your account electronically as soon as you make your purchase.

Debit cards, then, are almost like cash. Unlike writing a check, using a debit card saves you from having to show identification when you conduct a transaction. A debit card not only frees you from carrying cash, but it is also more readily accepted than checks where you aren’t known.

However, debit cards carry their own special set of disadvantages that you need to be aware of. Unlike credit cards, debit cards give you no grace period for paying your bill. The money is deducted from your account immediately each time you use it.

Unless you’re a fastidious record keeper, keeping your account in balance can be a problem. It’s easy to misplace a receipt and forget to notate the transaction in your check register.

That can result in overdrawn accounts and financial penalties.

While you get protection from liability due to fraud on credit card and debit card purchases, debit cards do not offer the same protection as credit cards in the case of defective or unsatisfactory merchandise.

With credit cards, you may dispute errors or unauthorized charges and withhold payment until the matter is resolved. This allows you to use your money while the circumstances are being investigated. With a debit card, your money is spent the moment you complete the transaction.

If you’re the type of credit user who lacks the discipline to keep your debt load manageable, debit cards will restrict you to making only those purchases you can pay for right now.

For some people, this can be a powerful motivator to switch to debit cards.

However, if you’re a so-called convenience user of credit — someone who pays off your credit card balances in full each month — the last thing you need is a debit card.

You’re now enjoying up to 40 days of free use of someone else’s money. This is called “using the float” — the period between the purchase date and when the money is actually withdrawn from your account.

In this case, you should congratulate yourself on your financial acumen and hang on to those credit cards.

Credit in itself is not harmful. In fact, used skillfully, credit can be a profitable tool for managing your professional and personal financial affairs. Observance of these tips will help to make credit one of your assets, not one of your liabilities.

William J. Lynott is a freelance writer whose work appears regularly in leading trade publications and newspapers, as well as consumer magazines including Reader’s Digest and Family Circle. He can be reached at lynott@verizon.net or through his Web site, www.blynott.com.

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