Loans and Debt

Buying any kind of product doesn't always require the outlay of cash.   Often there is an option for you to buy today and then make fixed dollar payments for a fixed number of months.   This general concept is a loan.   Loans can take a number of different forms, which are discussed later; however, a general understanding of the concept is worthwhile.   



Start with a source of cash in a financial institution (yes, it could be a bank but it could also be a credit union or a savings and loan, all of which are financial institutions). This money is sitting there, not earning any interest (interest is the price other people pay for the use of money for a period of time).   The owner of the money wants to have the money earn interest so the money is made available to anyone who is willing to repay the money over a fixed period of time, adding an interest payment at the same time.   Let's review a general understanding of the concept of 'Interest'.   This is a fact of life so get used to it.   Interest is a payment made for the use of 'cash'.   If you have $1,000.00, you can invest it in the stock market and hope that the stock increases in value, you can keep the cash in your mattress where it will never change but may be stolen, or you can deposit it into a financial institution and be paid for the use of this cash.   The financial institution will lend the money out to others people and charge them interest to cover the interest paid to you and the administrative costs.   If you want to borrow money, then you will pay interest, so accept this and let's move forward into how the loan works, recognizing that the interest exists.   Your biggest concern is getting the lowest interest rate possible.


A loan is comprised of four basic components:

            -                 Principal: first, the principal amount or the amount of the loan.

            -                 Interest Rate: second, the interest rate or the percentage of the loan that will be paid along with the repayment. This is normally expressed as a percentage and in legal transactions is indicated as the interest rate for one year.   With 8% interest on a $1,000 loan amount, the interest would be $80 per year.             -                 Loan Term: third, the number of periods the loan is outstanding.   Periods are normally expressed as a number of months or years.   A three year loan would be 36 months.   The period will often determine how often the payments are made.

            -                 Payment: fourth, the method of payment.   This indicates whether the loan will be paid in small payments each month or a fixed payment due at the end of the loan period.

                               -               Payment - Fixed: Fixed monthly payments are set up to pay a fixed dollar amount each month and, when the last payment is made, the loan is paid off including the interest.   A $1,000 loan at 8% for 12 months would require a monthly payment of $86.99 per month (12 payments equal $1,043.88).   The way this works is simple.   The monthly payment is $86.99, paid once a month (on the same day of the month) for 12 months.   For the first month, pay $86.99 (of which $6.67 is interest - $1,000 times 8% divided by 12), resulting in $80.32 reducing the principal loan amount.   Now apply the same method to the payment for the second month (starting with the revised principal loan balance).   Since the payment stays the same, the amount applied to the principal loan amount will go up each month.   If the correct amount is paid each month (yes, there is a formula), then the loan and the interest will be paid off by the end of the loan period.

                            -                 Payment - Balloon: A single fixed payment at the end of the loan is referred to as a 'balloon' payment.   So for the loan mentioned earlier, $1,000 at 8% for one year would require a balloon payment at the end of the year of $1,080.

                            -                 Payment - Combination: A combination of the two above types is a no-payment for one year then start making fixed amount payments.   The issue with this type of loan is that the interest during the first year is simply added to the loan amount when the loan converts to monthly fixed payments. Deferring payments can be deceptive and makes you think there isn't a cost until the payments start.

                            -                 Payment - Variety: In actuality, the variety of loan types is almost unlimited but the two primary types already mentioned will satisfy most conditions.   Most auto loans and home mortgages are of the fixed payment type.   Loan payments can be calculated on a spreadsheet program if you know the items identified above.   Most spreadsheet programs have a formula built in, and by entering the amount, the number of periods and the interest rate per period, the program will perform the calculation for you.


Most importantly, loan payment amounts are owed by you to the lender and you can't allow the payments to be missed or paid late.  This can impact your Credit Score. Meanwhile, there are some specific loan types that you need to be familiar with.



Credit Cards: This is technically called a 'revolving line of credit' because the card holder is provided a pre-approved line of credit that can be accessed by using the credit card.   When a purchase is made using the card, the outstanding loan balance goes up and the available credit goes down by the amount of the purchase.   When a payment is made, the interest charged on the outstanding loan balance is paid first and then the rest of the payment is applied to the outstanding loan balance.   As long as each payment brings down the outstanding loan balance and there is remaining credit available, the card can be used.   This process continues as long as desired, in that the balance revolves between purchases and payments.   Normally this type of loan is unsecured (does not require collateral, meaning there are no assets pledged to the loan repayment) and the credit line is based on the card holder's credit rating.


So, how does a credit card work?   A credit card represents a revolving line of credit.   The balance on the account increases with purchases and decreases with payments.   Purchases occur when the seller of goods or services accept the credit card instead of cash to complete the transaction.   The sequence of events starts with the seller running the credit card through an authorization terminal.   This terminal connects to a network that manages these types of transactions from all the sellers in a specific part of the country.   This network checks with the originator of your credit card to determine if there is sufficient credit line left; if so, the transaction is approved.  The seller will receive the amount of the transaction from the card originator, less the fees associated with the transaction.   It is not abnormal for sellers to pay 2% - 4% to have the transactions processed.   This is one form of income for credit card companies.


The transactions are posted to your account and a statement is generated on your cycle date.   Payment of the statement in total will eliminate interest charges.   If not, interest is charged and the payment is first applied to the interest and then against the outstanding balance.   Because credit card companies charge sellers a fee for processing a transaction, many credit card companies are offering rebates or rewards for using their credit card.   Some companies offer free miles with airlines, others offer 2% rebate, while others offer gift cards.   These companies make money because the amount of the transaction fee is more than the amount given in rewards. Here's the important point: credit card companies want you to use their cards.   They want you to incur transactions.   They want you to have an outstanding balance, pay interest and make small payments.   This is how credit card companies make money and the larger the outstanding balance, the more they will make on interest charges. Your best defense is to pay cash for everything and not use a credit card. Many people use a credit card for everyday purchases but commit themselves to paying off the card in full each month.   If you want to use the credit card to track your purchases, be prepared to pay off the balance each month, in full, otherwise, you shouldn't use credit cards for casual purchases.   Save them for emergencies and understand that the balance needs to be paid off as soon as possible.


Beware: There are many credit cards that offer incentives for using the credit card.   If you want to get the incentives, then when you use the card, be sure that you can pay off the credit card balance each month.   If you can't pay off the card, then don't use it for casual purchases and plan the payoff program before using the credit card.College students are targeted by credit card companies early on in hopes that the student will run up debts because this is an easy source of money to pay for those little conveniences.   Everyone should be trained in the use of a credit card, just like a checking account with an ATM / Debit Card.   Training is more a matter of understanding how and when to use the credit card and getting in a habit of making plans to pay off the card.   Just like setting goals in life, write down goals in how the credit cards will be used and what they will be used for.   Writing these things down reinforces the concepts and as you review your usage, you can see if you are living within the limits earlier established.   The first habit you should develop is a method for recording the transactions so the current balance can be maintained. 


The easiest way to build a habit is to use one of the new prepaid cards that can be reloaded each month.   This card allows limits to be established on the card and once depleted will be cut off.   Remember that the important lesson to be learned is when and why you use a credit card, you should not use a credit card on impulse.Personal Loans: Unlike a revolving line of credit, a personal loan is a one time loan with a starting loan balance and paid off over time.   Normally this type of loan is small and is unsecured.   This is an excellent way to build up a record of making timely payments.   


Educational Loans: While this is another type of personal loan (in that it is unsecured), the purpose of the loan is rather specific.   While an educational loan may not have a starting balance, it is paid out over time, as needed during the educational period.   The repayment will start once the educational period has ended or can be delayed for up to 5 years.   These loans can be very useful to delay the cost of education and often has interest rates which are lower than the prime rate (prime rate refers to the interest rate charged between banks for short term loans).   However there is a draw back to these loans; these loans begin charging interest from the first loan disbursement and then keep building the balance by adding the unpaid interest into the previous balance.   Each month the interest calculation base goes up since the previous interest in now included in the balance.

            -               Note: This type of interest accumulation is known as accrued and compounded interest.   This trick delays the start of the repayment but also means the starting principal balance for repayment is more than the amount you borrowed.   Compounded interest can be a killer when trying to pay off a loan.


Auto Loans: this type of loan is like a personal loan except the financial institution uses the car as collateral for the loan so the loan is now secured (which means the bank actually has the right to take possession of the car if you are late in your payments).   The number of periods are 12 months, 24 months, 36 months, 48 months or 60 months.   The interest rate on the loan will dramatically change the monthly payment amount and can be impacted by your credit score (note that the higher the credit score, then the lower the interest rate can be).   Once the loan is paid off, the car will belong to you without any liens from the bank.   These loans are normally for a fixed number of payments and fixed payment amount per month.

            -                 Note: the financial institution will require the proper levels of insurance be maintained to protect their security (the car).

            -                 Note: next time you see a commercial for a new car where they display a proposed 0% interest rate, look closely at the disclaimer.   Normally you will see something like; 'Well Qualified Buyers', which means that your credit rating will determine if you get the 0% rate.   Don't be surprised if you don't qualify.


Auto Leases: this is technically not a loan but instead an obligation for you to pay a specific amount of money each month for a fixed number of months.   At the end of the agreement, the car would be returned to the dealer.   Here again, you are required to perform the needed maintenance and insurance.   Leases have a number of restrictions including total mileage allowed.   A number of people have been surprised when the lease is over and when they turn the car back in to the dealer, they find they still owe a big final charge because the allowed mileage has been exceeded.


Home Loans (Mortgage):   this type of loan is like a personal loan except the financial institution uses the home as collateral for the loan.   The number of periods are normally either 15 years (180 months) or 30 years (360 months).   The interest rate on the loan will dramatically change the monthly payment amount and can be impacted by your credit rating.   Once the loan is paid off, the home will belong to you.   These loans are normally for a fixed number of payments and a fixed amount per month, but other options are available.   These loans require the home owner to maintain the property and provide insurance coverage to protect the value ofthe home in case of damage.

               -                 Time Periods: Yes, 30 years sounds like a long time, but that time frame is used because most people couldn't make the payments if it was only 24 months.   In fact, you may go through a number of these loans in your lifetime.   Some people buy a house and never move while others may move every two or three years.   The average is around seven years for the average person.   When you move, you sell the house, pay off the loan balance and take the remaining cash for the down payment on the next house.

              -                 Down payment: This is the curse for the first time home buyer.   While there are options to buy a house with no money down, most of the time the lender will want you to put some money down on the purchase to prove your intent.   For most people, this means saving money for a period of time before buying that first house.

               -                 Escrow Account: Unlike auto loans, home loans use an 'escrow account' in conjunction with the home loan.   An escrow account is used by the financial institution to collect enough additional money to pay for the insurance and real estate taxes directly.   The thing that can cause the amount of the payment to change is an adjustment in the escrow amount.   The escrow is intended to pay for the insurance and property taxes, both of which can increase over time.

            -                 Fixed Loans versus ARM (Adjustable Rate Mortgage): The difference between these loans is very simple.   A Fixed Loan is a fixed interest rate for a fixed period of time.   An ARM has an adjustable interest rate during the life of the loan.   The ARM interest rate can be adjusted each year (up or down) based on the economy.   As the rate changes, so does the monthly payment.   If the rate goes up, your payment goes up, affecting the amount of available cash.


Home Equity Loans: this type of loan is like a revolving credit line with the only difference being that the home is used as collateral for the loan credit limit.   Home Equity refers to the difference between the market value of the house and the amount of the existing loan.   As time goes by, often the value of the house will increase and, as payments are made, the loan balance continues to drop.   This type of loan is like a credit card loan, as cash paid out will increase the loan balance and payments made will reduce the loan balance, with interest being added to the loan balance each month.   Tax Impact: Incidentally, the interest paid each year on a home loan or equity loan is deductible on your income taxes in most cases.   Additionally, if you live in a house for a fixed period of time, using the house as your primary residence, the gain on the sale may be excluded from tax impact (in most cases).



Loan payments are required by you to satisfy the legal obligations of the loan agreements.   Most companies that provide loans also collect very detailed information on the borrower (you) regarding the timeliness of the payments.   This information is gathered by three primary credit agencies and tracked, providing an indication of your ability to handle your financial obligations.   Surprising, there actually is a Permanent Record of your life?   This is one of the sources where information about you is recorded, tracked and analyzed.   The information gathered by these financial institutions can dramatically impact your resulting credit rating.   Please be aware that the Credit Agencies track reported late payments for as long as seven years.


Home Loan Payment: These payments are made to the financial institution that currently owns the loan.   With large loans, like home loans, it is not abnormal for loans to be sold back and forth between financial institutions.     With each sale, you will receive a notification of the transfer and where the payments should be made in the future.   The home loan payment is normally the largest payment that most people will make (monthly) for a long period of time.   As discussed earlier, there can be home equity loan payments.   The equity line is a revolving credit line and should be paid off as soon as possible to eliminate the impact of the interest charges.   Also, the best uses of home equity credit lines is the purchase of those items with long term value, like a home remodel or expansion.   Don't use the credit line to pay for something that will be used before the credit line is paid off.


Auto Loan Payments or Auto Lease Payments: While both of these payments are legally obligated under the terms of the contract, these payments are also tracked for timeliness and reported to the credit agencies.


Educational Loan Payments: As indicated earlier, one of the best reasons for this type of loan is the low interest rate and the extended pay-off period.   As with any form of incoming cash, the opportunity to misuse the cash exists.   When using this type of loan, it is imperative to remember that the loan must be repaid and will require cash outlays for years in the future.


Credit Card Payments: Credit cards provide a convenience in purchasing the things you need in life.   The most important consideration in the use of a credit card is the fact that a purchase today will require a commitment of cash outlays in the future until the balance has been paid off.   Additionally, for special purchases or emergencies, the only amount that can be charged is the difference between the credit line and the credit card balance.   Credit card payments are based on the type of loan, a revolving credit line.   If there is an outstanding balance, only a very small payment (interest charged plus small amount to be applied to the outstanding loan balance) is required.

            -                 Account Reconciliation: Part of the process for a credit card is the monthly review.   This is known as the account reconciliation and starts with matching the previous transactions with those listed on the statement.   You are looking for any transactions which are not yours.   Mistakes should be reported to the credit card company immediately.   By reporting the problem early, there is time to investigate and resolve.   Next, make sure the previous payment has been properly recorded.   Lastly, verify that the interest rate is correct.

                  -                 Minimum: Normally, the minimum payment is the interest charged to the account plus 1% - 1.5% of the outstanding loan balance.   In other words, to pay off this credit card, the minimum payment could be made for years (anywhere from 10 - 15 years).   Interest rate is the other impacting part of the puzzle.   Credit card rates can range as high as 21% per year.   This means that on an outstanding credit card balance of $1,000 you would have paid about $200 in interest while reducing the balance on the account by barely over $100.

            -                 Payoff Plans: Whenever a credit card is used, you should plan how you are going to pay off the outstanding balance within 12 months.   The best approach is to divide the purchase amount by 12 and add 10%, then pay this amount each month until the balance has been paid off.   Eliminating the outstanding balance means that you can then use the credit line again, as needed.   The positive side of using this plan is that there will be a positive impact on your credit score over time.   Financial institutions like to see responsible use of credit lines.

            -                 Maintaining a zero balance: Lastly, the best use of a credit card is to pay off the outstanding balance from each statement each month.   This way, you will never pay interest and keep the credit line available for special needs or emergencies.Child Support / Alimony Payments: Payment of child support and alimony payments are legal obligations and can result in wage garnishment or jail time if unpaid.



Currently, there are three major credit agencies in the United States:

            -                 Experian

            -                 Equifax

            -                 Transunion

These three agencies collect payment history information from the various financial institutions around the country.   In addition, these agencies gather all the pertinent information on your existing debt, prior debts and available credit lines.   The credit agencies, in conjunction with the financial institutions, have developed a formula that takes all of the gathered information and creates a credit score for your financial profile.   The credit score will depend on the formula that is used and this credit score is a numerical representation of the assumed risk level of lending you money.   In other words, this credit score tells the lender how likely they will be able to collect the money from you in a timely manner, without delays or problems.   


Currently, there are two formulas that can be used.   The first, and oldest, has a maximum score of 850 points.   The second and newest formula has a high score of 990. In either formula, the credit score is an indicator of risk.   Based on your credit score, the lender will determine the potential level of risk associated with you making the payments required to repay the loan.   This level of risk is used to determine the interest rate that you will be asked to pay.   The lower the credit score points, then the higher the risk, so the lender will charge a higher interest rate to cover the potential for additional costs or losses.   The higher the credit score, the more favorable the interest rates will be in most debt related transactions.   


So, how does the credit score work?   If you think about it, then you can also figure out a method of calculating the score.   Here are a number of the factors and these are all tracked in your history with the credit agencies.   The first factor is the payment history.   A higher score would be assigned to someone that makes the payments timely for the proper amount.   When payments are made late, the score will drop.   Remember, the lender is making an agreement with you for a specific number of payments, made at specific times each month, in repayment for money borrowed today.


Another item that can impact the credit score would be looking at credit lines.   This is a combination of various data items.   Start with how much credit existS, then adjust the score based on how much debt exists from the credit and lastly include a score based on how much credit is available.   As you can tell, this is three pieces of information that can change from month to month, but the important issue will be how consistent these numbers stay over time.   Large fluctuations, up and down, can be questionable from the perspective of the lender.


Then the last major item to consider in the score would be how long has the credit existed and whats current versus recent.   Credit lines which have been around for years would be considered better than credit lines that were just recently opened (what is the person planning on doing?)   While there are other items that can be considered, these are the major items that can impact the credit score.


There is a lot of work and sacrifice in being able to achieve a high credit score.   This is accomplished by making sure your obligations are paid before making additional purchases.   A low credit score will haunt you for years in the future.   A low credit score can come from a number of sources, most of them relating to making delayed payments or not completely paying off a debt.   It is possible that a lender may decide that the collection of the $50 on a $3,000 debt will cost more than $50 and simply write it off.   However, that write off will be noted on your credit history and lenders in the future will take that into account when lending you money.


The damage comes from making late payments on any of your obligations, including those where you are required to make a timely monthly payment.   These payments include:

            -                 Rent Payments: It is not unknown in todays market for a landlord to run a credit check on a perspective tenant.   This is done to determine the likelihood of potential problems (late payments or skipping out).   In most cases, a landlord will require the tenant to sign a lease agreement.   The lease agreement requires the tenant to remain within the property for a fixed period of time.   Leaving before the contract is up does not eliminate the need to pay the rest of the rent payments for the remaining term of the lease agreement.

            -               Auto Loan Payments: Prior to approving a loan, car dealers will run a credit score check to decide which lender will get your business.   There are lenders that specialize in questionable loans and other lenders, offering better rates, will work with less risky customers.   Ever notice the television ads for a new car and zero percent interest?   The disclaimer at the bottom says that you must qualify.   Qualify means that anyone with a credit score over a fixed cutoff can get zero percent and everyone else will pay a rate based on the credit score.

            -                 Credit Card Payments: Credit cards are great ways to help increase your credit score or completely ruin it.   Making the minimum payments, or making payments late, is not the best indication that you can manage the payments on the credit card.   The best way to use a credit card to improve the credit score requires management of the purchases and payments.   Buy something and pay it off within two to three months, then wait a few months and do it again.   Using this process, the credit agency records two primary pieces of information: first, the cards are used and a balance exists for more than one or two months, and, second, the cards are paid off in a timely manner.   As long as this process is used while all other payments are made on time, your credit score is marginally improved, step by step.             -               Other Obligations: Depending on the relationship between the owner of the obligation and the credit agencies, this information may or may not be updated.   However, additional legal action filed against you in attempts to collect outstanding debts will also become part of the credit history.



What can be done to fix a bad credit history?   The only way to remove negative items is to work with the financial institution that put them there.   First, start by getting a copy of your credit history so you can see what everyone else is seeing.   You have the legal right to get a copy of your credit history from the agencies, one per year.   


Once you have the history, review it and see if anything is wrong (yes, mistakes are made).   These are the easiest to fix just by contacting the source and having them agree that the item is incorrect and getting them to remove the item.     Please note that you are entitled to a free credit report and can request it on-line.     The Fair and Accurate Credit Transactions Act requires that the three national credit agencies get together and create a service company to provide free annual credit reports (one per year from one of the credit agencies).   The service company created as the only approved location for requesting the free annual credit report.


There are other services that can provide credit reports, however, these other services are normally requiring you to sign up with a monitoring service in exchange for the credit report.   The monitoring service will charge you a fee for the service, so if you don't want to pay, be careful about which .com you go to.

            -                 How to develop a good credit score: Everyone starts with a blank sheet, which does not mean a good credit score.   It means that there is no credit history so there is no way to develop a credit score accurately.   A good credit score is built over time by making sure there are no negative items and showing a constant increase in credit limits.

                               -               Step 1: get a loan and make all the payments timely (without exception), until the loan is paid off.   There are a number of options for a loan, with the easiest being a credit card.   Often, getting a credit card may require a co-signer (most often a parent).   After using the card properly for a period of time (12 – 18 months), apply for a second credit card without offering a co-signer or ask the original company to remove the co-signer requirement.   Be aware of any credit card offer received in the mail that you did not request.   While you may be able to get a credit card, the interest rate is often very high and the lender is just trying to lock you into a long term relationship.

                              -               Step 2: Don't go overboard and end up with more credit cards than you need.   Having a few credit cards is acceptable; however, excessive cards will normally end up causing more problems than they help.   Also, turning down credit card offers shows that you can be selective and properly manage your needs.   Over time, evaluate new credit card offers and determine if they can provide better rates or conditions.   There is nothing wrong with canceling one card and getting a better one to replace it.   Bear in mind that you can go back to the original card issuer and ask them to match the rates and conditions, then change cards if you don't get the desired resolution.

                            -               Step 3: Make discretionary purchases on credit cards.   Don't use the credit card for day to day purchases unless you are committed to paying off the credit card in full each billing cycle.   Making a large purchase and paying it off on a planned schedule can be as effective as using the credit card daily and paying off the balance in full each month.Please note that paying off debt looks good on the credit history.   Good credit items can have a positive impact for years, exactly how long is a question for your credit agency.   The good thing is that negative items are dropped off faster.   The most recent information is a better indicator than items from 5 years ago, as long as a positive trend is maintained.



What happens if you do run into trouble with your debts?   You can repair the problems yourself.This information is critical.   There are a number of advertisements and Internet emails talking about Erase Your Debt or Fix Your Credit Score.   DO NOT BELIEVE THESE CLAIMS.   While there are companies that will work with a debt agency to help make the payments lower or reduce the interest rate, when a debt agency writes off your debt, it will end up on your credit report as a negative mark. Meanwhile, for everyone that claims they can fix your credit score, unless there is a mistake, then the claims are very unlikely.   It is possible that the negative items may be removed for after a period of time, but they will come back once proven to be accurate.   These people will charge you a fee and provide nothing that you can't do yourself with a little effort.


Let's get back to the problem of fixing the problem yourself.   First, make a detailed list of all of your existing debts.   This would include the current balance, the associated interest rate, the minimum payment amount and the number of periods left where payments are required.Second, list the debts in terms of outstanding balance with the associated interest rate.   Take the top three items with the highest interest rate.Third, write down a plan.

            -                 Putting the plan on paper re-enforces the objectives you have determined to be the best option for you.   This written plan will also allow you to come back later and compare your ability to stick to the plan.

            -               So, getting back to the plan itself.   This is normally very simple. You have the accounts listed along with each account balance, associated interest rate and minimum payment amount (because you did this in the first and second steps).   Total up all the minimum payments into a single total amount.

            -               If you haven't already completed a budget, do so now.   It is vital to know how much cash is left over after paying everything else except the credit cards.   Committing to a plan requires sacrifice so plan on giving up some of the money spent on anything that is not essential.   Is the total minimum payment amount less than the available cash from the budget?   If yes, then we are making progress.   If not, rework the budget and make more cuts or figure out a way to make more income (this is the reason why mom or dad took a second job).

               -               Develop a schedule of payments by month for each card.   Start by paying each card the minimum amount.   Now select the account with the highest interest rate and apply all of the leftover cash to this account.   Fill out a schedule, month by month until the first card is paid off, then go to the second card and do it the same thing again (nice thing is there is more cash available since there is not payment being made to the first card anymore).   Develop a schedule, month by month, until each card is paid off.

            -               Next, contact each credit card company starting with the companies with the highest interest rates.   Explain that you are experiencing debt problems and would like to ask for their help to get yourself out of debt.   Be truthful, don't try to pretend there is nothing wrong.   Ask them to reduce the interest rate so that you can complete the payoff faster.   Tell them you have developed a plan and intend to stick to the plan until all of your debt has been eliminated.

                            -                 One of two answers can be expected.   The first is a flat 'No'.

                            -                 The second is that they will be willing to work with you.   If they are willing to work with you then there are two options.

                            -               Often, they will be able to reduce the rate a little (even 1% - 2% can be an improvement).

                            -                 The second option is that they may be willing to consolidate some of the other balances into a single balance.   If this option is offered, make sure that there is a reduction in the interest rate also.   With this type of plan, work with the credit card company to make sure the other credit cards are canceled.  Establish how much will be paid each month AND STICK TO IT.   Often a consolidation plan provides for a smaller total payment and if so, use the extra cash to make larger payments to the next credit card with the lowest outstanding balance.   Yes, I know you are thinking that going after the highest interest rate would make more sense, but by paying off the smallest balances first, you have more cash to apply to the next credit card.   Sooner or later, you'll get to the highest interest rates, but keep calling those high interest rate companies and, with constant payments, they may decide to work with you and lower the interest rate.

                            -               Remember, there are no overnight solutions to a problem that didn't develop overnight.   You make some bad decisions and now you must sacrifice to resolve the problem.

                            -               Now you have a plan.


Fourth, do not generate any additional debt until the cash position has been re-established.   Just because there is a credit limit available is not a reason to generate new debts, requiring new payments.     Managing a debt elimination program can do as much to help a poor credit score as anything else.



This is an issue that is growing around the world and there is no doubt that this is a crime.   Identity theft occurs when someone, other than yourself, uses your identification to access your accounts and your credit line or your credit score.   This can mean access to your checking account, investment accounts, available credit lines, or establishing new credit lines with purchases that can run into the thousands or tens of thousands of dollars.


While most people think that this can't happen to them, there are a number of ways that it can happen unless you take precautions.

               -               The easiest way is for someone to steal your wallet.   When this happens, it is imperative that you immediately cancel all credit cards and place holds on all checking accounts and debit cards.   While this may seem like a silly precaution, place all of your credit cards, driver license and other identifications on the screen of a copier and copy, then turn everything over and copy again.   Place these copies someplace safe and then you can use them to cancel the cards.   Also, make sure that you contact the police and file a report for your protection and insurance purposes.

            -               The second way is referred to 'dumpster diving'.   This is where someone goes through your trash looking for something that has your personal identification information.   A shredder will put the stop to this problem if it is used.   Don't just throw out trash, destroy the trash that identifies you.

            -               Lastly, but becoming more popular, is the approach of collecting your information from the internet.   Do not put information that can be used to identify you in anything like Facebook or a personal web page.   While security will protect you from most people, there are plenty of hackers looking for a quick buck.

            -               Other protections include any of the companies that protect your identity, Life lock comes to mind but this is not the only choice.   Before working with any company, check out the reviews and the pricing, these services are not free and over time, can add up.

            -               You can control the available information.   Do not carry excessive credit cards and do not card your Social Security card.   The social security card and birth certificate should be kept under lock and key.   Also, every piece of mail that you get may provide information to a potential thief so reduce unwanted mail by calling the company and asking to be removed from the mailing list.

            -               Always be suspicious whenever someone contacts you and claims to be with one of your credit card companies or bank.   If they ever ask that you provide information over the phone, refuse.   Write down the caller ID if you can and call the company back using the number published on your paperwork.   Give them the caller ID and ask if there any problems with your account.   This is especially true of an email that indicates there is a problem with one of your accounts and you need to provide information to fix the problem.

            -               Under federal law, you have the right to review your credit reports each year, free of charge.   Use this service - - to order your credit reports.   Other services use names that are similar but there is normally a charge involved in these services.   This service does not provide your credit score, only the credit reports, but this allows you to review the information in your file and make corrections, where needed.   You can also contact each cedi agency directly, but this service is easier.

                            -               Equifax: 800-290-8749

                            -               Experian: 888-397-3742

                            -               Trans Union: 800-888-4213

            -               If your identity is stolen and you make every effort to notify everyone, you cannot be held accountable for these purchases made by the identity thieves. Here is the problem, if you are not aware of the identity theft occurring, the damage done to your credit history can take years to completely clean up.   The process of cleaning up the credit history is very time consuming and, even more important, reduces your options for using your credit history while the clean-up is underway.

            -               Also, using the phone numbers above, contact the fraud unit of each credit union so a hold can be placed on your account.   The police report and your statement of the incident will be kept on file at the credit agencies.

            -               Also, contact the Federal Trade Commission Identity Theft division to report the crime and get assistance 877-438-4338 or contact them on-line.Here's the bottom line, the only choice you have is to protect yourself.   Here are some ways.   First level of security is to protect your information.



Social Security Number: First and foremost, your social security number should be a very closely guarded secret.   Originally, your social security number was an identification developed by the government to keep track of you for social security benefits.   The number was also used by the Internal Revenue Service because the number, in conjunction with other data, create a unique identity.   Also, the revenue you earn is the basis for your social security benefits once you retire.   This number has grown to be a method of identification for a number of financial purposes, beyond the original intent.   Most frequently, when checking with credit agencies, is used to check your credit standing.   For this reason, you are often asked for your social security number when attempting to open new accounts ranging from credit cards to auto loans to phone service.   So yes, you are required to provide it in many situations when you are trying to get service (telephone or cable), a loan (home loan or auto loan or credit card), or filling out tax related paperwork.   However, there are many places that ask for the social security number and are using it only as a means of identification for their files.   You are within your rights to refuse to provide it (doctors office or dentist office).   Your social security number is required for anyone checking your credit history, but should not be needed elsewhere except for receiving social security benefits.   Do not carry your social security card or put it on your checks. Destroy personal financial related documents:

            -               Destroy means to shred with a cross cut shredder.   Cross cut shredders can be purchased at any office supply store or department store.   While strip shredders do a good job, the best protection comes from cross cutting.   Why?   A lot of personal information can be retrieved just by going through your trash and, yes, people will go through your trash if there is a chance to steal your identity.

            -               Financial related documents is a rather broad group.

                    -               When you are done paying your bills, destroy them.   This includes any bill which has your name, address and an account number.   This includes utility statements, insurance billings, or medical statements.

                    -                 Old loan records or bank statements should be destroyed.   These documents could have more information on them than you think.

                    -               Any credit card bills should be destroyed.   Also included in this group are any mailings you receive from existing credit card companies or offers for new accounts.   Any balance transfer offers or checks from credit card companies should also be destroyed.

                    -               Look at any outdated pay-stubs and destroy these also.

                    -               Lastly, if you are not sure, go ahead and destroy the document if you are not going to keep it.


If there is ever a phone call from someone that claims to be the financial institution or a credit card company or anyone else and they are asking you for your personal information, be suspicious.   In order to protect yourself, tell the caller that you are in the middle of something else and will call them back and ask for their phone number. Then look up the number in the phone book and call the organization directly.   Tell the organization that someone just called looking for information and you are responding, give whomever answers the name of the original caller and the phone number.   Do not call back on the number provided.   If you ever receive an email from the Internet.


It is not abnormal to receive emails from Paypal or Ebay telling you that someone is trying to access your account and just click on the link to verify your information. Identity theft, thanks to an international network, can occur from any country in the world.   The Internet has created it's own vocabulary to describe the actions, both legal and illegal, that occur on the Internet.   There is spamming, philshing, scamming, spyware, Trojans, malware and hacking.   Fraudulent emails are used to gather personal information through misrepresentation.   Emails directing you to identical web sites asking for personal or banking information can be received looking just like the emails from a legitimate financial institution.   The best defense is a solid offense; if you are unsure if the email is fraudulent, DO NOT USE THE LINK IN THE EMAIL; go to the company web site and speak directly to a customer service representative.


Everywhere you go, you need user ID's and passwords.   DO NOT use your address, phone number, birthday or last 4 digits of your social security number as the password.   The best thing you can do is sit down at home and pick a set of random numbers to form passwords, or if a word is permitted, then take two words that have nothing to do with you and form a password.   If you think about it beforehand, then the words become easier to remember.   An example would 'sea_horse' or 'sand_patch' or 'black_cactus', you can make up lots of variations.   Also, these things can be hard to remember so there are various software packages that can store personal information and passwords in an encrypted format.   If you don't want to use one of these packages, write everything down in a notebook and lock it up.   Don't forget to physically protect your personal information at home.   If at all possible, try not to leave records and statements lying around for everyone to see or steal.   On any given day, there may be a number of people coming and going and you may not know who all of them are.   Get into a habit of keeping all of your personal information in small lockable cabinet and put it out when your are done.


This is just a reminder, but take the time to make a list of all your checking accounts, saving accounts, credit cards, loans and open accounts.   Include the name of company, the contact phone number and any account number which is applicable.   Keep this list under lock and key.   If your wallet is ever stolen, use this list to contact everyone and appraise them of the situation.   Being prepared can save considerable time and effort when the worst happens.



After protecting your personal information, the next step is to be on the look out for something that is out of the normal.   Here is where tracking the expenses becomes important.   You should know when to expect each account statement from every different company.   When statements do not come in the normal time frame, you need to find out why.   Also, by knowing when account statements are scheduled to arrive, you will notice when something shows up that shouldn't be there.   This could be the sign of a problem especially when the account statement is for an account that you didn't open.   Immediately contact the company that sent out the statement and find out what is going on.     If an account was opened without your knowledge, contact the police, the county attorney or the state attorney and file a complaint.   Currently, there are multiple agencies that can provide assistance; however, as enforcement becomes more standard, the process will also become simpler.   Next, there are a number of steps that need to be taken, but you may be able to stop the damage.

               -               Contact the three credit agencies and inform them of the problem.   After they have satisfied themselves that you are the proper person, they can place a notice on your account, stopping future inquiries for new accounts.   Also, ask them to look at your credit history for the past three – six months and provide you a list of every company that performed a credit check.

            -               Take the list of the recent credit checks and contact them to see if an account has been opened or an application has been presented.   Normally, these companies will work with you if you have filed a police complaint.   All new accounts should be frozen or shut down.   Make sure that all of the companies provide you with written reports as to the actions taken.   Make sure that the companies understand that this is not your debt and the charges should be removed.   Provide the names of the companies and the status of the accounts to the police also.

            -               Now contact all of your existing accounts and make them aware of the problem.   It is imperative that you protect the existing accounts that you rely on.   Sometimes, the company may wish to cancel the existing cards and reissue.   On utility type companies, ask them to set a code word or password on the account so that only you can make changes.

            -               Ask for help and advice from everyone you talk to.   The credit agencies want to stop the problem so they will provide specific services like placing a 'fraud alert' on your account for the future.   The people in law enforcement will do all that they can, however, there are things that only you can do and they can provide suggestions.   There are ways to report problems to the FTC (Federal Trade Commission) and you should do everything you can.If you attempt to open a new account and the account is rejected unexpectedly, this is also a red flag.   New accounts must go through a standard check and if something has changed in your credit history, you may be rejected where once you would have been approved.   Remember that the smart identity thief may not have the statements sent to your address.   As part of this, be concerned if someone contacts you unexpectedly about a purchase or delivery for something you didn't order.


Lastly, don't forget the annual review of your credit history.   Per federal law, you are permitted to request a free copy of your credit history from one of the three credit agencies.   These can be ordered by calling 1-877-322-8228 or by going on-line to   This one location is the only free credit history report, all of the others offer a credit history, but you are required to sign up for a credit monitoring service.   While a credit monitoring service can be useful, this is an additional expense.   



It has often been said that there is no free lunch, which is meant to imply that no one is going to offer you something for nothing.   In the period of one week, it is not abnormal to receive emails regarding your winning of a lottery that you didn't enter or that someone you don't know needs to transfer a large amount of money and you will be paid a huge percentage if you will help.   The Internet is a business and people don't make money by giving something away for free.


As mentioned before, beware of anything on the Internet.   Don't respond to offers that you did not request.   Don't respond to any unsolicited emails that request any personal information.   If you are going to provide information, go directly to the company web site and use the forms provided.   The legitimate services provide encrypted transactions and most of the services will not ever provide a problem.   There is a new service provided by credit card companies where you buy a card at convenience stores and   pre-load with a balance.   These cards are great because if someone hacks the number, they can't spend more than what you loaded on the card and there is no way to track the card   back to you.


There is a web site for the FTC which can provide some additional information, forms, tips and suggestions.   Please visit



Many companies will charge a fee for late payments.   Late payments on a loan contract can provide the lender with an option for increasing your interest rate.   Late payment fees and increases in the interest rate can only delay your ability to pay off the loan.


Then, after the lender charges the late fees, they report the late payment to the credit agency.   You get hit with the late fee and with a negative mark on your credit history (the old double whammy).



There is a new service that has grown in the last few years.   Companies offer an advance on your next check, providing cash today.   Normally this is accomplished when you give the company a check today that they will hold for a fixed period of time.   The problem is that the cash advance is not only for the amount needed but also for a processing fee.   This means that you end up with less after the next paycheck than before, and you'll probably need another advance before the next paycheck. Like a rolling stone, this process will never seem to stop and keeps putting you further and further behind.



Lots of old crime drama movies have crooks caught in pawn shops.   A pawn shop is an older concept from the times before Payroll Advances.   In this case, you take an item of value into a pawn shop and 'pawn' the item.   To pawn an item means that the shop owner will give you money in exchange for the item.   You are not selling the item, you are pawning the item with the owner of the pawn shop.   Here's how he makes money:

            -               First, if the item is worth $100, he will give you a percentage (assume 50%, or $50) and if you want to get the item back, you must give him a percentage (assume 75%, or $75) within a period of time.

                            -Note: these percentages are for illustration purposes only and can change from one location to another.

            -               Second, if you don't buy the item back, ownership passes to the pawn shop owner and he can sell it for whatever price he wishes.

            -               In this example, if you buy the item back, he makes $25 on a $50 loan.   If you don't buy the item back and he sells it for $85, then he makes $35 on a $50 loan.   The only risk he is taking is that there is no way to know how long the item will remain unsold in his store.