Financial Tips | Debt Management

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11/28/07

Do Credit Counseling Services Really Help?

In order to answer this question effectively, one would have had to actually participate in a credit counseling service. Fortunately for you, I have participated in such a service. There was a time in my life (mostly during college) when I would irresponsibly use my credit cards. I was deeply in debt and was having trouble making monthly payments. I decided that I needed to solve the problem by hiring the services of a credit counseling company.

Basically, these companies contact your creditors and get your interest rate and monthly payment lowered. Your credit accounts are closed (therefore, you can no longer use them and your credit score is negatively impacted, although not by much) and all of your debt is pseudo consolidated. These companies claim that your debt is consolidated into one, low monthly payment. Although it is true that you do only make one monthly payment, your debt is not consolidated. Each one of your credit card companies is still owed its respective debt amount. You only make one payment because you pay your credit counseling service, which in turn pays each one of your individual credit card companies its individual share. Additionally, the credit counseling company takes a fee for this service.

For the most part, these companies help you get organized and do help you pay down your debt. In my experience, they do not completely cover all of the ramifications of participating in such a service, however, if you do your homework and ask all the questions you may have, you will discover the whole story. If you do not like the answer you are given, ask the question again or ask for clarification.

The only problem I had with my credit counseling company is that they sometimes were not timely with my payments to my creditors. You have to make sure that your payments are being made to the appropriate creditors for the appropriate amounts. Additionally, you have to make sure that the credit card companies are recording the payments and are not adjusting your interest rate. It can be a tedious process, but if you put in the effort and weigh the benefits against the disadvantages, you should conclude that a credit counseling service is one viable solution if you are struggling with credit card debt.

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Should you Pay off your Debt or Invest?

Many financial gurus advise that you should always pay off your debt first. In my opinion, whether or not you should pay off your debt first comes down to the interest rate you are paying on your debt versus the interest rate you could collect (or the return you could get) by investing.

Debt comes in many different forms. Many people have credit card debt, student loans, a mortgage, and some kind of auto loan. Many financial gurus state that you should pay half of your monthly mortgage payment every two weeks. By the end of the year, you will have made an additional monthly mortgage payment. This extra monthly payment will help you pay off our mortgage faster. Unless you plan on living in your home for the next 30+ years I do not like this plan. A mortgage is a fixed payment. Additionally, if your monthly payment is too high you can refinance your loan (if your credit is good). Also, many people do not live in a home long enough for the mortgage interest rate to take a toll on their finances. Also, most homes appreciate in value at a rate higher than the interest rate on the mortgage. Last, mortgage interest is tax deductible. Therefore, paying off a mortgage is not something I would take into account when deciding whether to pay off debt versus investing.

The main inquiry should be whether you should pay off your credit card debt before investing. Credit card debt usually carries an interest rate of anywhere between 8-30+%. If you have a credit card with an interest rate of 8%, you are in the minority. 8% is a very low credit card interest rate, therefore, it is more likely that you possess a credit card that has 10% or higher interest rate. Meanwhile, I am unaware of any risk-free investment that yields a 10% return. Therefore, in this case, you should pay off your credit card debt first.

If, however, you find an investment that yields a return higher than your credit card interest rate, than the investment looks like a good choice. However, you must take into account the risk involved in the investment. The stock market goes through many changes. You definitely do not want to pay your full credit card interest rate and at the same time lose a percentage of your investment.

Always carefully analyze the investment situation before you choose to invest in lieu of paying off your credit card debt. In most cases, it will be better and more profitable to pay off your debt before you invest. However, do your homework and there may be an exception that you discover.

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Spending on Credit Cards

Spending on credit cards can become a very large problem if you do not keep track of what you are doing. If a you have one credit card, it is easy enough for you to keep track of your spending. Additionally, if a credit card has a low credit limit, that limit will be a ceiling for your spending habits. Keep in mind that I am not suggesting that you use your credit card until you “max it out.” I am merely suggesting that the credit limit, if low, will prevent you from getting too deeply into debt.

As I stated, if you only have one credit card, it is relatively simple to keep track of your spending. However, what if you have more than one credit card? Two credit cards should still be easy to track, but what about three, four, or even five cards? At what number does credit management become difficult? This is the problem that many credit users face.

I was reading a survey in the October/November 2007 edition of Young Money magazine. The article stated that of the 670 college students that participated in the survey, 22% received at least 6 credit card offers per week. In addition, a separate survey in which 796 college students participated stated that 34% own at least three credit cards (specifically, 24% of the 796 participants owned more than three credit cards). Why is this relevant? This survey (although the survey sample is extremely small) shows that some college students have more than three credit cards. Here is the point; if you keep track of each credit card (let us say that you spend $100 per card) but you do not keep track of the entire balance on all cards, you can find yourself in a deep hole.

In your mind, you may think that you only spent $100, but when the bill comes for all the credit cards, you are going to be in for a rude awakening. What if you have five credit cards? $500 is very different from $100. The point is, you have to keep track of all your credit card spending as a whole.

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11/27/07

The Importance of Knowing What is in your Credit Report

Many people believe that they are immune from fraudulent or incorrect information in their credit report. I, however, have experienced a phenomenon I like call “credit reporting agency stupidity.” I would like to use a less harsh word than “stupidity,” but after what I have experienced with these credit reporting bureaus, “stupidity” is the only word that accurately describes their practices.

I am named after my father, therefore, we share the same name. The only difference between my name and my father’s name is that my name has the Roman numeral “II” following my name (denoting “the second”). My social security number is different and, quite obviously, my birthday is different. One would think that any one of these differences would lead a credit reporting agency to understand that my father and me are two separate individuals. However, such is not the case.

I cannot tell you how many banks and credit bureaus I have had to contact in order to remove items from my credit report that belong to my father. It is amazing to me that a credit reporting agency with millions of dollars cannot figure out that I am a separate individual from my father. Are they so ignorant to think that nobody in this country has the same name as another person? Is not that why the government provides social security numbers so as to distinguish between the numerous people with the same name? I can only imagine the problems in the credit report of a person named “Michael Smith!”

The point is, you need to check your credit report regularly to avoid any shenanigans that the credit reporting agencies love to create. Make sure that all the information in your credit report is correct. If you find any inaccurate information (even if it is something like your current occupation or your phone number) dispute the inaccuracy and provide the correct information. Trust me, you do not want to experience “credit reporting agency stupidity.”

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11/23/07

How Bankruptcy Can Affect Your Credit Report

A bankruptcy is probably the worst, one trick pony that can happen to your credit report. Before you decide to file for bankruptcy, you need to think long and hard about the benefits and penalties. The most obvious benefit is that most of your debts will be discharged (with the exception of certain debts like mortgages, student loans, and IRS liens), however, a bankruptcy also means that your credit report and your credit score will be severely damaged.

There are many people that advocate against using or even obtaining credit. I have actually read articles that suggest that Americans are completely ignorant as to the purpose of a FICO score, and that anybody who tries to obtain a higher credit score is a fool. In my opinion, these advocates are nuts! There is more potential harm in not having a credit score than there is in maintaining a good credit score. What does this have to do with bankruptcy? Well, if you care nothing about your credit score or credit report, a bankruptcy probable will not be a big deal for you. Your debts are discharged and off you go. However, if you are a person that realizes that a high credit score could be a great asset to possess during your journey towards achieving success, you need to know the harm that a bankruptcy will cause to your credit score and credit report.

First, your credit score will be greatly reduced. By filing for bankruptcy, you demolish your creditworthiness. You are basically telling potential creditors that you have a very high risk of defaulting on any loan, therefore, you will not qualify for most loans.

Second, if you file for bankruptcy, that bankruptcy will be reported on your credit report for up to 10 years. I would like to believe that the bankruptcy report is automatically deleted from your credit report after 10 years, but the truth is, you will probably have to contact all three credit reporting bureaus and tell them to remove the bankruptcy from your file.

Last, because a bankruptcy severely damages your credit score and credit report, you better not plan on moving or buying a car for at least 10 years. Unless you have cash to afford these things, you will either get denied for a loan flat out or your interest rate will be so high that it is not worth taking out the loan.

If your credit score and credit report are important to you, consider all of your debt management options before deciding that bankruptcy is the best choice.

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11/20/07

When Credit Cards Become an Addiction

There are many benefits to credit card ownership. You can develop a strong credit report and a high credit score. These will result in lower interest rates for you on loans that you may take. Additionally, your debt to credit ratio could help you apply for a big loan. Another advantage is the spending power that a credit card offers. Do not misunderstand what I am saying; a high spending power does not necessarily mean that you should utilize that power whenever you want. Doing so will result in financial hardship and probably, some legal issues.

One definition of “addiction” is “the state of being enslaved to a habit or practice.” Therefore, is it possible to be addicting to credit card spending? I believe that it is possible to be addicted to such a thing. Continuously using your credit cards without regard for the financial and legal consequences sounds like an addiction to me. Keep in mind, I am not a doctor of any kind and therefore am not qualified to give an opinion as to a person’s psyche. However, irresponsible credit card use can be a serve problem if a person does not know how to control the problem.

Solving the problem of irresponsible credit card use requires preventative measures. Teaching a person the possible dangers of irresponsible credit card use is the first step towards creating a responsible credit card user. Educate yourself as to the correct and responsible way to use credit cards. This is the best way to safeguard yourself against irresponsible credit card use.

Although this is sound advice, how do you kick the credit card spending habit after you are already “addicted?” Your primary concern should be for your financial welfare. Because of this, you may have to close all of your credit card accounts in order to achieve this primary concern. Closing all of your credit card accounts will negatively impact your credit score, however, it will save you from the continuous spending. Credit scores and credit reports can be repaired, however, your financial welfare is much harder to fix.

Remember, credit card ownership is a privilege. Therefore, if you cannot handle the responsibility of credit card ownership, do not get a credit card. There are other ways to build a credit score and credit report, and if you cannot do it with credit cards, you will have to utilize other methods.

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11/19/07

Why You should Shred your Mail and Documents

Identity theft is rampant. It seems that everywhere you look, somebody has had their identity stolen. Just recently, I saw a news story on the Orange County news about a pair of individuals that were going around to mailboxes and stealing all of the mail.

Due to all of the incidents of identity theft, you have to protect yourself at all times. There are many things you can do to protect your identity, including, (1) subscribing to a credit card monitoring service (you will get alerts if there has been a change to your credit report); (2) setting purchase limits on your credit cards (this means that you will be personal notified and have to give approval for any purchase over a set amount of dollars); and (3) you can safeguard your personal information. This list is not exhaustive.

One of the easiest and most effective ways to safeguard your information is to shred any mail or document with your personal information on it, before you throw it away. Many people get credit card offers, bank statements, and other pieces of mail that contain large amounts of personal data. People generally look at the piece of mail, and subsequently throw it away. The problem with this is that many identity thieves search through trash cans and steal people’s mail in order to gather enough personal information to steal that person’s identity. Know that it does not take that much information to steal an identity.

By running all of your mail or documents through a cross cut paper shredder (which are relatively inexpensive and can be purchased at any office supply store for around $30-$40) your mail and documents become a mass of confetti that making it near impossible for an identity thief to get information off of these documents.

Protect yourself from the frustration that is identity theft. The best way to do this is by limiting the opportunities an identity thief has to steal your identity. A simple as it may be, shredding your mail and documents through a cross cut paper shredder is a very simple, effective way to accomplish this task.

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How Does a Debit Card Work?

A debit card looks exactly like a credit card. It will have the same shape, color, and magnetic strip that a credit card has. A debit card is used almost exactly the same way as a credit card. In fact, there are times when a debit card is used exactly the same way as a credit card. For example, if you are at the grocery store and you want to pay with a debit card, you swipe your cad through the machine and type in PIN (PIN means personal identification number). If the bill clears your debit is approved and on you go. However, if you are in a restaurant, you card is swiped like a credit card and instead of having to type in a PIN, you have to sign a receipt.

So, if everything is exactly (or near exactly) the same as a credit card, what is the difference? The main difference (and the most important difference) is that a debit card is secured. In other words, a debit card is linked to a checking or savings account and uses that money to pay a bill. Put simply, a debit card is a glorified checkbook. If you do not have the money in the checking or savings account, your purchase will not clear (the purchase will “bounce”) and you will thus not be able to make the purchase.

You have probably all seen the television commercials for the Visa check card. This is a debit card. If you were to get that card, you would have to link it to a checking account of some kind in order to use the card. All of the national banks offer their customers a debit card when the customer opens a checking account. Getting the debit card from your bank is incredibly easy and convenient. However, if your bank does not offer you a debit card with your checking account, you can use other debit cards (like the Visa check card) with your checking account.

Debit cards offer much convenience, however, when people use debit cards, they tend to lose track of their spending. Therefore, if you use a debit card, I recommend that you still record your expenditures in your checkbook in order to keep everything balanced.

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11/16/07

Online Credit Card Approval

Needless to say, electronics and the Internet have changed the way that people maintain and conduct their financial affairs. Internet banking, Internet bill pay, and Internet credit card applications have paved the way for faster and more effective money management.

Pre Internet banking dominance, everything financial was done through the United States mail and telephone. Everything was a slow process. In regards to credit card applications, you had to go to your local bank and get one, or you had to wait for a credit card offer to be sent to you in the mail. You had to fill out the credit card application by hand and mail it to the credit card company. If your application was accepted, you would receive a letter a couple of weeks later telling you such. Another few days later, you would receive you credit card. On the other hand, if your application was denied, you had to wait those few weeks just to discover this fact.

Thank goodness for the Internet and instant credit card application decisions. Nowadays, all you have to do is go to the website of the credit card company in which you are interested. You select the credit card of interest. Next, you fill out the available credit card application. Once that is complete, you submit the application and get a credit card decision, usually, within thirty seconds. Thirty seconds sure beats a few weeks!

If you are in the market for a credit card and you have never used an Internet credit card application, I suggest you give it a try and get an instant credit decision.

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11/14/07

Moral Issues Involving Credit Cards

Some moral issues exist regarding credit card use, ownership, and providing. Credit card companies are faced with the moral issue of offering credit to people that cannot afford to have credit. On the other hand, credit card users are faced with the moral dilemma of maxing out a credit card with the intention of not paying back the debt. Both issues are equally important and both can be viewed as business decisions.

In regards to credit card companies; sometimes, a credit card company will target people with bad credit and/or low income. A credit card will be offered to these people. The credit card will have numerous fees and an astronomically high interest rate. Credit card companies will argue that these fees and high interest rates are necessary in order to offset any losses due to people defaulting on their debt. However, another way to look at it is that a credit card company can charge these high interest rates and numerous fees because people with bad credit and/or low income do not have an alternative option. Therefore, the moral issue of taking advantage of people comes into light. Should credit card companies be allowed to offer these sub standard credit cards to people with few assets? The quick answer is that credit card companies are not doing anything illegal. Then again, the plain for what is legal is far below the plain for it is considered “moral.”

In regards to people; many people take advantage of credit card companies by obtaining many credit cards, “maxing” them out, and then refusing to pay the debt. Basically, this is fraud because the person never had the intention of paying back the debt. Other consumers are hurt by this default by way of higher interest rates and more fees (as discussed above). Therefore, what if a poor person used a credit card to buy food and supplies with the intention of never paying back the debt? Should they be punished? Isn’t that person merely trying to survive and not trying to take advantage of a credit card company? Is it the credit card companies fault for giving such a person a credit card?

I cannot provide any answers to these questions because everybody has a different sense of what constitutes “morals.” There is no general standard for moral behavior. Therefore, the situations presented above are for personal consideration. What do you think the moral standard should be? Do you think that a degree of morality should be infused in the practices of a credit card company and an individual credit user? Would you be willing to pay more fees and a higher interest rate in lieu of a credit card company giving credit cards to people with bad credit and/or low income?

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11/10/07

Credit Report Disputes

Many times, inaccurate information will appear on your credit report. In my experiences, one of the most common mistakes credit reporting agencies make is that they mix up the credit information of family members with the same name. For example, my father and I share the same name. I cannot tell you how many times my father’s credit accounts have shown up on my credit report. It is very frustrating, however, all one can do is fix the inaccuracy.

The easiest way to remove inaccurate information is to dispute the inaccuracy. The three main credit bureaus (Experian, Equifax, and TransUnion) all have options where a person can dispute inaccurate information through the respective credit bureau’s website. First, you should only dispute the inaccurate information to the credit bureau that has reported the inaccurate information. Therefore, if the inaccurate information is reported only in your Equifax report, there is no need to dispute anything in your TransUnion report because the inaccurate information is not in your TransUnion report. It is important to note that these three credit bureaus are completely separate entities. Therefore, for example, if inaccurate information appears in your TransUnion and Equifax report and you successful get the inaccurate information removed from your TransUnion report, that does not mean that Equifax has to also remove the information.

I wish the process was as easy as sending in a dispute of inaccurate information and waiting for the inaccuracy to be removed from your credit report. However, it is not that simple. Credit reporting agencies are very stubborn. Things will not be easy and you may have to dispute the same inaccuracy more than once. However, with persistence, you should be able to remove inaccurate information.

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Should you Transfer your Credit Card Balance?

A credit card balance transfer is when you take the balance on one credit card and pay off that balance with another credit card. The balance on the first card is thus effectively transferred onto the second credit card. Why would anybody do such a thing? Put simply, people do this to save money on interest rates. However, there are some dangers that can defeat the purpose of a credit card balance transfer.

As I stated, people transfer credit card balances in order to save money on interest rates. If you have a credit card that has a 23% interest rate and another card with a 15% interest rate, why not transfer the balance on the 23% interest rate card to the credit card with the 15% interest rate? You will save money and you will only have to make one payment instead of two.

The first problem that people run into is that sometimes a credit card does not have enough available balance in order to receive the transfer. Therefore, if you need to transfer $500, but only have $300 available balance on the card to which you want to transfer, obviously you cannot transfer the whole amount. I would caution transferring $300 of the $500 because then you will have one card “maxed out.” This will negatively affect your credit score, and could lead to trouble with fees (over the limit fees) down the road.

The second problem people face is that sometimes they transfer a credit card balance to a card with a teaser rate. You might see a credit card that advertises a 0% interest rate for six months on all credit card balance transfers. You may think, “This is great!” However, you have to check the fine print. Most of the time, the interest rate after the six month introductory period changes from 0% to 20%+. Make sure that the default interest rate is lower than the current interest rate on your credit card or else the whole purpose for transferring your credit card balance will be defeated.

Third, make sure that there are no fees associated with your balance transfer. You should not have to pay additional money for transferring money. If the credit card to which you want to transfer your balance wants to charge you a fee, find another credit card.

Balance transfers can be a benefit. Avoid the teaser interest rates with sky high default interest rates. Additionally, if you conclude that a balance transfer will save you money, make sure that the card to which you transfer has a noticeably lower interest rate. It is a waste of time to transfer from a 22% interest rate credit card to a 20% interest rate credit card. If you use balance transfers effectively, you could literally save thousands of dollars.

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11/8/07

Credit Card Rebate Programs: Are They Worth It?

Of all the credit card rewards programs that are offered, cash back rewards cards are my least favorite. Many credit card companies offer many different types of rewards programs. The most common rewards programs are cash back, airline miles, and rewards points. Each card is different, and thus, you must carefully check the terms and conditions of each credit card so that a fancy rewards program does not blind you from a high interest rate and/or high fees.

Usually, when a card offers cash back rewards, the cash back reward is one percent (1%) of the amount you charge. Therefore, for every $1,000 you charge to your credit card, you will get a $1 reward. Is that really a reward? Think about it like this, in order for you to earn $1,000 worth of cash back rewards, you would have to charge $100,000. If a person is charging $100,000 to a credit card, do you really think that $1,000 is significant to that person? I do not think so either, therefore, I generally avoid cash back reward cards.

As I mentioned above, my favorite kind of reward card is a points card. I like the variety of options on which you can redeem your points. Additionally, some credit card companies offer “double points” or point bonuses on specific purchases (such a gasoline).

Regardless of the reward you choose, you must be aware of what you are giving back to the credit card company in order to obtain this reward. For example, if your rewards card requires an annual fee, do not get the card. Additionally, many rewards cards have a high interest rate. The point is, make sure that the rewards credit card is acceptable under regular credit card standards (this means a low, fixed interest rate and no annual fees) before deciding to obtain that rewards card.

Cash back rewards cards are not worth the effort, therefore, look for a rewards card with more benefits and better options. However, make sure that you are not sacrificing suitable credit card requirements in order to get a “rewards card.”

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The Credit Card Trap

I advocate owning and using credit cards. I believe that if a person uses credit responsibly, they can greatly benefit from such use by way of a high credit score and a strong credit report. However, there are two common, credit card blunders that many people make. If you avoid these two common blunders, you can avoid the credit card trap of creating more debt than you can handle.

The first most common mistake that many people make is that they only pay the minimum payment due. Paying only the minimum payment is the worst thing you can do, monetarily. If you make consistent, on time, minimum payments, your credit score will positively reflect such. However, your bank account will negatively reflect the same also. If you only pay the minimum payment, you should just take your balance and double it because this is the true amount you will probably pay. By paying only the minimum payment, you are basically only paying the interest. For example, if you had an outstanding balance of $1,500 at 12% interest, and you paid only the minimum payment of $20 per month, it would take you over 11 years to pay off the debt. Additionally, you will have paid over $1,200 in interest in addition to the $1,500 balance. Therefore, a balance of $1,500 cost you $2,700 to pay off. That minimum payment is not looking so good anymore is it?

The second most common mistake people make is that they use a credit card to pay the bill of another credit card. This practice baffles me. If you use a credit card to pay the bill of another credit card in order to obtain rewards points, and you pay off the second card in full each month, then paying a credit card with a credit card makes sense. However, this is not the situation to which I am referring. The mistake people make is when they pay a credit card with another credit card because they do not have the money to pay the bill of the first card. All a person is doing is making the situation worse. By using credit cards to pay off credit cards, a person is actually making the debt larger due to interest. Why do that to yourself?

Avoiding these two very common credit mistakes will help you practice responsible credit use and will also help you avoid the credit trap.

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11/7/07

What are Platinum Credit Cards?

Traditionally, credit card companies have levels for their credit cards if they offer more than one card. Usually, the credit card company has a base card. There is usually no color scheme attached to this card and it usually has the worst interest rate and credit limit. As you use that card and establish a good credit score, the company many offer you its gold card. This is the next level in the credit hierarchy. This card usually has a better credit limit and a lower interest rate. Additionally, this gold card probably comes with benefits like concierge service, roadside assistance, rewards points, or some other incentive. Eventually, you may be offered the platinum card. This card is usually the flagship card for the company. It will have the best interest rate and the best credit limit. In addition, it will have the best incentive and benefits package. Some companies offer a card that is “higher” than a platinum card. These cards are super exclusive and are very hard to obtain.

You need to beware of these gold and platinum cards. Sometimes, they are better by way of lower interest rate and higher credit limit. However, many times credit card companies will throw in annual fees on these “higher” cards. I am a firm believer that there is no reason for an annual fee, therefore, unless some amazing benefit is offered by the card, you should be wary of this fact.

Another thing you need to be cautious of is that credit card companies use the terms “gold card” and “platinum card” as marketing terms. Basically, you think you are getting something special, but it ends up being a terrible card in a shiny, attractive color. Do not be fooled by these marketing techniques. Always take a look at the credit card’s interest rate, fees, credit limit, and rewards options before you make any decision. Think about it like this: would you rather have a blue card that has a 9.9% interest rate, no annual fees, a credit limit of $5,000, and rewards points or a platinum card that has a 12.9% interest rate, a $50 annual fee, a $5,000 credit limit, and rewards points? To me, this is a no-brainer. I say, keep your platinum card if it is worse than my regular card. The point is, do not be deceived by marketing. Get the card that is best for your situation.

In a traditional sense, platinum cards can be a better card to possess and usually has to be earned, however, beware of marketing tricks and annual fees that tarnish the attractiveness of a platinum card.

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Credit Card Safety: How to Check your Statements

Checking your credit card statement is an important practice to establish. Many times, people just look at the minimum amount due or the balance and pay that amount. The problem with this is that they may be paying for a charge that they did not make or that was incorrectly calculated.

I have a story for example purposes: many quick caf├ęs and small coffee shops have a small device that they use to swipe your credit or debit card to pay for your purchase. You may have noticed that some of these machines require that the employee type in the amount to be charged. The coffee shop I was at had one of these machines. My total was $6.07, however, the coffee shop employee accidentally added a zero to the end of my total. Therefore my $6.07 charge became $60.70. Luckily, I caught this error when I went to sign the receipt. The problem was immediately handled, however, had I got my credit card statement and just decided to pay the balance without looking at the charges, I would have paid about $54 more than I should have.

The point is, mistakes happen. Therefore, you should always check your credit card statement to make sure that all of the charges that appear on your statement are legitimate.

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Credit Card Woes to Consider Before you Apply for your Credit Card

Put in simple terms, you need to be responsible with money before you should even consider applying for credit. If you have trouble managing your finances, obtaining a credit card is only going to add to the problem. You may be tempted to purchase expensive items even though you do not have the money to pay off the charge; you may build a large debt with improper credit card use; you may also be paying more in interest than you ever do in principal. All of these things will damage your already struggling financial situation. Do not add to the stress.

Assuming you are responsible with your finances, a credit card is a powerful financial tool that can help you achieve whatever financial goals you may have. However, high fees, high interest rates, and improper use can quickly plague any advantage a credit card may give. Beyond that, there are also other factors to take into account before applying for a credit card.

There is an old saying, “out of sight, out of mind.” This is true when it comes to credit cards. The temptation of using a credit card is strong if you really want to buy something. This temptation can be avoided if you do not have the means with which to buy the item. Therefore, if you have a “temptation problem” leave you credit card at home. If you have a serious “impulse buy” problem, you need to consider this before applying for a credit card, and you may need to reevaluate your purpose for getting a credit card.

Another problem or woe you need to consider before applying for a credit card is the time frame of credit card bills. Many people do not consider the fact that their bank account decrease during a standard billing period. Therefore, if you have the money to pay your bill at the first of the month, that does not necessarily mean that you will still have the money at the end of the month. Other bills such as gasoline, food, water, mortgage or rent, utilities, cell phone, etc are also paid monthly. Therefore, consider whether you can really afford to pay another bill (in this case a credit card bill) before you decide to apply for the credit card.

Last, because credit cards are so easy to use, many people do not keep track of their spending. Not until they go online to look at their statement do people realize how much they have really spent. If you are a person that keeps track of his/her finances only because the internet provides you with a balance statement, you need to establish better spending tracking practices so that you do not end up spending more than you can afford.

The common woes will always be interest and fees, however, temptation to buy, time frame budget considerations, and keeping track of your spending are big considerations that need to be evaluated before applying for a credit card.

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How to Eliminate Credit Card Debt

There are many options you can use to eliminate credit card debt. Some of the options are fairly basic and will take time. Other options are extreme, and while they will eliminate your credit card debt, they will also heavily damage your credit score.

First, you can pay over time while eliminating credit card use. This is the most basic way to eliminate credit card debt. All you have to do is pay more than the minimum balance (and by more I mean 20% more than your minimum balance) while eliminating your credit card use. This means that you do not use any credit cards during the time period in which you are repaying the debt. What sense does it make to pay down one credit card while you are charging an equal or greater amount on another credit card?

It is important to note that you only want to stop using credit cards. You do not want to close the credit card accounts. Closing your credit card accounts will hurt your credit score and offer no benefits for you. Therefore, do not do it.

Second, you can call your credit card companies and ask for lower interest rate. This tip should be used in conjunction with the first tip. By lowering your credit card interest rate, your monthly payments will count more towards your principal. Thus, you will pay off your debt sooner.

Third, you could consolidate your debt. I am sure you have seen many of these kinds of companies advertising on television or on the radio. Basically, these companies call your credit card companies and negotiate a lower interest rate and a lower monthly payment. Your credit card accounts are closed (this is a negative because is negatively affects your credit score) and you send your monthly payment to the debt consolidation company. That company then sends your payments to the appropriate credit card companies. These consolidation companied are usually “non-profit” and take a small fee to cover “administrative costs.” Make sure you fully check out the company before giving them your business.

One other point on consolidation; your credit card companies will send you a letter once an interest rate and monthly payment have been negotiated. This letter will basically state that if you are late on a payment while you are using this debt consolidation program, the deal is off and your credit card will reset back to its original interest rates and back to its original monthly payment. Therefore, do not be late.

Last, you can file for bankruptcy. I am not going to pretend to be an expert in bankruptcy, therefore, if you choose this option, go see a qualified attorney. What I can tell you is that filing for bankruptcy will severely damage your credit score. Additionally, filing for bankruptcy will cost you several thousand dollars. The attorney fees for bankruptcy will be less than the interest fees you would have paid over the life of the debt (assuming the outstanding debt is large enough), however, bankruptcy should always be your absolute last resort. As I stated, if you have questions about bankruptcy, go see an attorney.

Many options exist for you to eliminate your credit card debt. Make your choice wisely because a wrong choice could damage your credit score for years to come.

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11/6/07

How I Raised my Credit Score

About two years ago (October of 2005) my credit score was in the 620s. In case you are wondering, a score of 620 is not particularly good. In fact, it is a bad credit score. Today, my credit score is over 740. A score of 740 ranks in the top tier of creditworthiness. How did I raise my credit score over 100 points in less than two years? Before I answer this question, I need to give you a little background information.

My credit score was low because I had late payments on my credit report. Late payments can stay on a credit report for up to 7 years. I did not want to wait 7 years because I had plans for certain types of investments. These investments required a decent credit score, and thus, I needed to find a solution.

First, I obtained a copy of my credit report. I noticed that some of the negative accounts on my credit report were not even mine. One of the negative accounts was opened when I was 6 years old. I called the credit card company and asked them when the started giving out credit cards to children in the first grade. The stunned silence on the phone proved to me that they got the point. The negative accounts that were not mine were removed from my credit report. This increased my credit score.

Second, I got a referral from my real estate teacher for a company that will fix a credit report. I called the company, paid a small fee, and followed the instructions that they gave me. Basically, I was told to continue to pay my outstanding balances in a timely manner and to refrain from using and applying for any credit cards. The company would contact the credit reporting companies and dispute any negative information on my credit report. Less than two years later (which is far better than 7 years) I sit with a score of over 740.

If this plan of action does not work for you, you can always pay your cards on time, reduce your outstanding balance, and wait for any negative information to be removed from your credit report. The choice is up to you.

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11/5/07

Things You Need to Know Before Applying for a Credit Card

Applying for a credit card is an interesting step along the financial journey of a person. There are many rewards and pitfalls accompanying credit card ownership and use, however, if you use credit responsibly, the rewards will shine through and the pitfalls will be minimized.

First, you need to know your purpose for getting a card. If you want a credit card to buy something you cannot afford or because it makes you feel like a responsible adult, then a credit card is probably not right for you. However, if your purpose is to establish a solid credit report and credit score and to build your creditworthiness, then a credit card can be an important tool to achieve these goals.

Second, you need to know if you have a credit report or a credit score. If you do, you need to obtain a copy and know what is contained in the report. If you do not have either, this information is also helpful. The point of discovering this information is to help you determine the credit cards for which you qualify. There is no need to apply for a card that has requirements that you cannot meet. Therefore, find out this information to narrow your available options.

Third, you need to know your limits. This means that you need to know your yearly salary and how high of a limit you can afford. Additionally, you need to know whether you want to pay over time or in a lump sum every month. Knowing these limits (i.e. yearly salary, affordability, flexibility of payment, etc.) will help you make a wise credit decision.

Last, you need to know the interest rates and fees associated with the card in which you are interested. Never get a card with an annual fee and focus on cards with low, fixed interest rates. Avoid cards that have a low introductory interest rate that resets to a high interest rate. Additionally, avoid cards with a variable interest rate. If undervalued by the applicant, these rates and fees can add up quickly and make the credit card have more pitfalls than rewards.

Discover your purpose for getting a card, find out your relevant credit information, know your limits, and find a card with good rates and little to no fees. Knowing these specific points will help you make a wise credit decision from which you could benefit for years to come.

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11/3/07

Credit Card Applications for Beginners

Credit card applications are fairly straight forward and need no special training or education to fill out. However, there are some things you should know.

First, put your full, legal name of the credit card application. The credit card company uses this name to check your credit report to determine whether or not you are approved. Therefore, if you use a shortened name (for example, if your name is Christopher, do not put Chris on your application) on your credit card application, you are going to cause confusion amongst the credit reporting bureaus and are thus going to set yourself up for a credit report dispute in the future. Avoid all of this by always using your full, legal name.

Second, do not lie about your monthly or yearly salary. You are not going to get a higher credit limit by doing this, and additionally, your credit report is not going to support this contention. The point is, do not lie on your credit application.

Third, sometimes you are a student and you are employed, therefore, which should you put down when the application asks for employment status? In my opinion, you should use whichever job title (student or full-time employed) gets you the most benefits for the card for which you are applying.

Last, use internet applications whenever you can. I do not feel comfortable mailing or giving so much personal information (e.g. phone number, address, full name, social security number, employer, employment status, yearly income, etc.). Therefore, submit your credit applications through secure websites. Additionally, when you apply online, you usually can get an answer on your application within 30 seconds.

Following these tips will help make your credit card application go faster and more successfully.

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Credit Card Safety: Is your Number on that Receipt?

Many merchants (including retailers, restaurants, grocery stores, etc) have fixed what used to be a regular practice. Not too long ago when you used your credit or debit card to pay your bill, your entire credit card number or debit card number (as applicable to the situation) would appear on both the merchant’s receipt and the customers copy.

Many people may not see a problem with this. However, if you think about it, many of us just toss our receipts into the trash when we get them. With the rise of internet banking (which automatically keeps track of your debits and credits on your accounts) many people do not know how or just do not balance their checkbook. As such, there is no need to keep your receipt. But what if an identity thief happened to find a receipt in the trash and your entire credit card number was on the receipt? Would you care? You should care because a lot of damage can be done with just a credit card number.

As I mentioned, many merchants have fixed this problem by only putting the last 4 numbers of your credit card number on the receipt. The other numbers are replaced with an “x.” However, if you use your credit card at a place that does not “x out” your credit or debit card numbers, make sure you shred your receipts in a cross cut shredder (after you no longer need them) before disposal. By doing this, you will limit the possibility of somebody stealing your identity.

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Getting a Second Credit Card Without Good Credit

First thing first; if you have bad credit, you should really evaluate your reason as to why you want a second credit card. If you have bad credit, that means that you were not using credit responsibly, and therefore, getting another credit card may get you into more trouble and more debt.

Reasons you should not get another credit card if you have bad credit include, but are not limited to: (1) to pay bills (this is probably the worst reason); (2) to go on vacation or any other trip; (3) to buy something you cannot afford; and (4) any other reason that does not include improving your credit report and raising our credit score.

If you have bad credit, your primary reason for getting another credit card needs to be to improve you current credit score. If this is your purpose, then I applaud your efforts and know what you are going through. Just know that your second credit card is not going to be as good as your current card.

First, because you now have bad credit, the second card is probably going to have a higher interest rate and a lower credit limit. Additionally, you may be subject to some fees that you did not have to pay for your first card.

Second, make sure that you do not get a card that has too many fees. The point of your second card should be to increase your credit score. However, you should not go broke on credit card fees to achieve this purpose. If worst comes to worst, do not get another card. Use your current card responsibly and gradually build your credit score over time.

The point is, do not put yourself in more debt just because you feel that a second credit card will help you achieve your purpose sooner. The ends have to justify the means, and thus, you should not obtain a card that requires the payment of tons fees and a higher interest rate. As I stated above, if you can only qualify for cards with high fees and high interest rates, do not get a second card.

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11/1/07

What to do if You Think Your Credit Card Number Has Been Stolen

If you think you credit card number has been stolen, the first thing you should do is make sure that your damage is minimized. Immediately go online or call your credit card company and check what recent charges have been made on the card. If no charges have been made, but you truly believe that your credit card number has been stolen, you are better safe than sorry. Have the credit card company deactivate your credit card. After this is done you should start the process of getting a new card from them.

If you check your account online or through a phone call to the credit card company and you discover a charge on your account that is not yours, you should immediately inform the credit card company that your credit card number has been stolen. Second, you should tell the credit card company to deactivate the card. After that you should dispute the charges as fraudulent and seek to have them removed from your statement so that you are not liable for the charges. Additionally, you should begin the process of getting a new card from the credit card company.

The best way to prevent theft of your credit card number is by making sure that any paper you discard does not have your credit card number on it and that if a paper does have your credit card number on it, that the paper is shredded by a cross cut shredder before discarding it.

Protect your credit card number and you can avoid the big headache of fixing this kind of problem.

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