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.  


GENERAL UNDERSTANDING OF LOANS
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.


TYPES OF LOANS
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 of
the 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
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.


CREDIT SCORE
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 830 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.


FIXING THE CREDIT SCORE
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 AnnualCreditReport.com 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.


IN DEBT TROUBLE?
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 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.


IDENTITY THEFT
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 - https://www.annualcreditreport.com – 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.


STANDING GUARD
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.


ON THE LOOK OUT
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 www.annualcreditreport.com.  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.  


AVOID AT ALL COSTS
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 www.ftc.gov/idtheft.


LATE PAYMENTS
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).


PAYROLL ADVANCES
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.


PAWN SHOP
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.