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Smart Credit Decisions for Entrepreneurs – Business Credit

Smart Credit Decisions for Entrepreneurs – Business Credit

Smart Credit Decisions for Entrepreneurs

(Dallas, TX-National-Credit-Solutions) Without inventive young entrepreneurs, we would have no iPhone, no Facebook, no Starbucks, and no Disneyland. Thankfully, bright young thinkers still continue to take risks and dream big, but many of the most creative entrepreneurs still have trouble funding their startups. Here is a look at how entrepreneurs can make smarter credit decisions that will help them transform their ideas into reality:

 

1) Open a business credit card

Many entrepreneurs do not have a long credit history, which can be problematic when applying for small business loans. However, it is crucial to start building good credit as soon as possible to further your business. Once you have enough personal credit history to open a business credit card, create a separate account for your business so that you can start funding it with credit.

2) Don’t mix business with your personal life

While there are a few success stories where entrepreneurs have used their personal credit cards to build their business, this often causes more problems than not. Separating your personal finances from your business finances can save you a great deal of stress and endless headaches.

3) Create a cash reserve

It is a good idea to build a cash reserve in case of emergencies. Entrepreneurs often hit snags in their plans, and many have to fail a couple of times before they succeed. Don’t let this deter you from pursuing your ideas, though, just consider setting aside a certain amount of cash each month in case you run into a rough spot. This cash can help bail you out of debt that could (if left unpaid) wreck your credit score.

4) Be aware of your debt-to-income ratio

While ambition is one of the most admirable qualities of entrepreneurs, it can also lead them into tumultuous financial situations. Instead of being overly ambitious and optimistic about your new business, play it a little safer so as not to max out your credit cards and become burdened with debt. Keep your debt-to-income ratio low to avoid sinking your business.

Entrepreneurs need to maintain a good financial record for various reasons: to appeal to potential partners, to obtain a loan for business expenses, to start another business, and to attract investors. It’s no secret that entrepreneurship requires risk, but it also requires attentive financial maintenance and smart credit decisions.

5) Know what’s on your Dunn & Bradstreet report

Do you know how potential creditors view your business credit?  If not, it may be time to check your D&B report.  Dun & Bradstreet has a huge database of more than 140 million business records.  Similar to the Credit Report Agencies, Experian, Equifax and TransUnion, D&B is a data furnisher that is used by potential investors, lenders and business owners to determine the credit-worthiness of a business.  If you are the owner or authorized business agent of a business, you can obtain a Dun & Bradstreet Report and Score online for free.

The credit mistake you’re making

(Dallas, TX-National-Credit-Solutions)

Everybody knows that failing to pay off your credit card balance on time can be devastating for your credit score, but fewer people know about another serious credit mistake – closing credit cards. credit-mistake

While you may think that it is prudent to cancel old or unused credit cards, this seemingly harmless action can actually backfire and hurt your credit score.

“But how?” You may be wondering, as closing a credit card may seem like a financially responsible decision. Many people think that since closing a credit card will lower their credit limit, it will help them spend less or will make their finances easier to manage. Unfortunately, what people don’t realize is that canceling a credit card often directly affects your “credit utilization ratio” – your debt-to-credit ratio.

For instance, if you have a credit limit of $1,000 and have a balance of $800, your debt-to-credit ratio would be 8-10, which is considered extremely high. Ideally, you should try to spend between 10%-30% of your credit limit, and then pay off the balance quickly.

If your credit utilization ratio is high, credit agencies will consider you a financial risk, which can negatively impact your credit score. And even more bad news: your credit utilization ratio is the second largest component of your credit score – a whopping 30%. Therefore, keeping a low debt-to-credit ratio is crucial for maintaining a good credit score.

To understand how closing a credit card can affect your credit utilization ratio, consider this example: if you have three credit cards that, when combined, give you a $10,000 credit limit, and you typically only charge $2,500 to your cards each month, your credit utilization ratio is 25%, which is within the desired range. However, if you decide to close out one of these cards, whether because it is old or because you think it might simplify your finances, your credit limit will drop drastically.

Closing out a card with a $3,000 limit will now give you a debt-to-credit ratio of 2.5-7, or about 36%. So just by canceling one credit card, whether or not it is one you actually use, you have significantly raised your credit utilization ratio, thereby damaging your credit score.

However, there are certain instances when it makes sense to cancel your credit card: when your card is used fraudulently and the credit card company does not cancel the card and issue a replacement, or when you find a lower rate card and want to switch.

In these cases, it is still important to take precautions when closing old credit cards and opening new ones. First, make sure that the credit limit of the new card is equal to or higher than the one you are closing, as this will help ensure that your credit utilization ratio is not affected. Also, timing is everything when canceling a credit card. If you decide to cancel one, avoid doing so before applying for a loan in order to keep the interest rate low. Wait until after the loan is approved to close the card. And, of course, it is always important to manage your credit utilization ratio wisely to keep your credit score strong.

If you feel that having multiple credit cards is causing you to spend beyond your means, shred one of them or hide it somewhere deep inside your closet, just don’t cancel the card!

Why Students Should Start Building Good Credit Now


Why Students Should Start Building Good Credit Now

For many college students, the idea of establishing credit rarely crosses their minds; or if it does, they assume that credit is something that they won’t have to worry about until far after graduation. This isn’t the case, however, as building good credit during your years in school is crucial for preparing you financially for life after college.

Why Good Credit Matters to Recent College Grad

good-credit

1) Employment Opportunities

Your credit score can start impacting your life immediately after college. Many employers conduct credit checks of potential employees, and a bad credit score could make you seem financially irresponsible, which could ultimately deter an employer from hiring you. If you choose to follow your dream of becoming an entrepreneur instead of finding a job right out of college, a good credit score is even more important. Most young entrepreneurs do not have the capital to successfully start their own businesses, and therefore must rely on receiving small business loans, which are difficult to obtain without good credit.

2) Living Situations

Aside from your career, your credit score also affects your day-to-day life. Unless you plan on moving back in with your parents, having a good credit score will help you find a place to live after graduation. Many landlords will conduct credit checks when you apply for a rental to ensure that you have a good history of paying off your debts, and a bad credit score could cause landlords to turn you away.

3) Transportation

Finding a method of transportation can also be difficult when you have bad credit, as both leasing and buying a car is easiest and most affordable with a good credit score. Most recent grads do not have the cash to buy a car, which means that a loan is necessary. Not only does your credit score determine whether or not you qualify for a loan, but it also helps lenders decide on the interest rate of the loan. Establishing a good credit score while you are still a student can help you save money by avoiding high interest rates on car loans.

Ways College Students Can Build Good Credit

Many students are under the impression that they can only start building credit once they have a reliable source of income. Whether you work part-time at your school’s cafeteria or babysit occasionally on the weekends, you can (and should) start building credit immediately.

1) Ask your parents for help

Owning a credit card is a huge responsibility, as you must realize that every time you swipe the card, you are using real money that you are obligated to pay back. Because of the weight of this financial responsibility, students can ease into establishing credit by “piggybacking” on their parents’ account. The parents can monitor the student’s spending since the child is an authorized user of the account, and if the parents have good credit, the student’s credit score will also improve.

2) Apply for your own credit card

It is surprisingly easy for most college students to get a credit card, as many lenders assume that your parents will help you out if necessary. When deciding on which credit card to apply for, make sure to consider the card’s interest rate, credit limit, fees and penalties, and rewards program. Be extremely cautious when using your credit card, however, as many students tend to get carried away with spending when their credit limits are high. To avoid this, ask your credit card issuer to keep your credit limit low so that you can easily pay off any balances you incur.

3) Make small purchases

As a student trying to build good credit, it is important that you do not spend more money than you can afford to pay off. Try to keep your spending under 30% of your card’s limit, and use it mainly for occasional small purchases such as food, music, or movie tickets.

4) Pay off your balance every month

The most important step in building good credit is paying off your balance every month. When you are first trying to establish credit, it is a good idea to avoid carrying a balance on the card. To do this, though, you must be strict in your spending habits and only purchase things that you know you can afford.

College is not only a time to receive a good education and to learn how to live independently, but it is also a great time to start establishing yourself financially. Building and maintaining good credit in college can be easy and hassle-free if done correctly, and a good credit score can be invaluable after graduation.

Debt consolidation warnings and tips

pill“Debt consolidation.” It has such an alluring ring to it. It creates this fantasy that you can wrap up all your debts into one attractive, low interest package, and everything will be hunky dory with your debt. Sadly, the easy quick fixes are often rather bad for you, financially and credit worthiness-wise.
This glorious idea of an easy fix to being thousands of dollars in debt has been fertile soil (fertile with manure) for an entire industry with fabulous claims of lower monthly payments, low interest rates, and zero hassle.

You know what they say about something being too good to be true though…

So before you jump feet first into debt consolidation, be sure you’re aware of a few things.

  • Debt consolidation companies are not nonprofit organizations, they won’t improve your credit, and they won’t do anything you can’t do yourself. Here’s the deal, from an industry insider: you gather all your paperwork and send it to them, they tell you how much to pay them each month, then they’re supposed to negotiate lower payments and interest with your creditors and make the payments for you. The reality is they are notorious for paying your bills late, destroying your credit, they take 10-20% of what you pay them each month for “administrative costs” (it’s not profit, they’re a nonprofit organization, remember), and they once again can’t get better rates than you can by spending some time on the phone with your creditors. Some of the worst of them will even purposely let your debts charge off so they can negotiate a better settlement on your debts once they’re turned over to a collection company, allowing them to take a portion of the money they “save” you. Believe me, with the hit your credit will take by doing that, and the resulting higher interest rates and fees you’ll have on everything after that due to your abysmal credit, you’re not saving anything.
  • So what if you’re not going with a debt consolidation company, but are instead getting a debt consolidation loan? Well, that is a much better option, but it’s still not a good option. First of all, chances are good you’ve got some dings on your credit already if you’re looking for a consolidation loan, so the chances of you getting a loan are pretty slim, and if you do get the loan, your interest rate isn’t going to be better than the cards you’re paying off. So you get the convenience of one payment, but no monetary savings, and that’s what this is supposed to be about, saving money, not just convenience. So don’t believe the promises of easy money, it’s just a lure to get you in the door like a wide mouth bass.
  • What about flipping your debt from card to card chasing the no interest balance transfers? Well, it’s bad for your credit, the banks will catch on and cancel the cards, it’s illegal, and there is the little thing of our failing economy and the fact that those zero percent interest cards just aren’t available anymore. This solution is so… 2007. Reality caught up to this plan about a year ago.

So what should you do?

  • Get a home equity loan. This will have a low interest rate and the interest will be tax deductible. You’ll have the up-front costs of origination fees, insurance, and an appraisal. Warning though, this isn’t as easy as it once was before the mortgage crisis, but if you’re lucky enough to still have equity after the freefall of housing prices, this is an excellent option.
  • Negotiate with your creditors on your own. Remember the credit card industry is “losing” tons of money right now because the impending enforcement of the credit card reform act, so they’re probably going to be more willing to bend to keep the paying customers they still have. This gives you leverage. They want you paying, and paying them, not defaulting or taking your business to another bank.
  • Refinance your home, cashing out your equity. This is different from a home equity loan and will give you lower monthly payments because you’ll probably get a longer loan term than a standard equity loan. Keep in mind though; this is going to cost you more in the long run because you’re extending the length of your mortgage without lowering the price of the home. If you can get your credit cards debts paid off though, and then apply all or a portion of what you were paying the credit cards companies toward your mortgage, you can minimize or overcome the damage though.
  • If you have somehow weathered this without destroying your credit already, a personal loan from a credit union might be an option. You’ll get interest rates in the 10-15% range most likely, but that’s still better than the 24.99-29.99% you’ll be paying on credit cards these days.
  • If the situation is truly dire, you might also want to consult with an attorney. It’s sad, but true, that is some situations bankruptcy might be your best option. I strongly advise seeking legal advice before going down this route though.
  • Last, but certainly not least, there’s the hardest, yet easiest option. Living within your means. Paying off your debts can be accomplished by putting more money toward them each month. That might mean cutting back on eating out, getting rid of the 300 channels of cable since you probably only watch 3 of them anyway, maybe carpooling to save gas, get a second job, etc. Make a personal budget, find where you can cut back, and put that money toward the bills. This doesn’t require loans or lawyers or anything else because it easy, but living within your means can be so hard. It takes self control and determination, but the rewards are great.

The credit card companies find new ways to make lemonade, part 2

Part 2 of 2

Banks are evil

How to protect yourself.

  • Keep in mind the interest rate increases won’t affect you if you’re not carrying large balances.  Going from 9.99% to 14.99% isn’t going to really impact your wallet if you’re already living within your means rather than living on credit.
    • Be aware of the fine print on your credit cards.  If you know that the new card with the 0% introductory rate for the first 12 months is going to instantly jump to 24.99% if you’re even a day late during that time frame, you’ll probably be a little more careful about making sure the payment is sent on time.
    • Pick cards with lower long term rates rather than teaser rates that expire and then go up.  The longer you have a card the better it is for your credit score, so you want cards that will still be useful to you 2 or 3 years down the road.
    • Read the mail you get from your credit card issuers.  I too have been guilty in the past of just finding the payment due and ignoring the rest of the information stuffed in the envelope, and I’ve been burned by it.  The banks are notorious for slipping in information about rate changes or changes in your terms of service.  Stay informed, that way you’ll be able to change your spending habits before the card goes to 99.99% next month.
    • Cash advances…  just don’t do it.  The interest charged on cash advances is always significantly higher than the rate charged on regular purchases, and to add insult to injury, when you pay your bill each month the credit card companies are going to apply your payment to your normal purchases, not the higher interest cash advance balance, first.
    • This one may be obvious, but PAY ON TIME.  Don’t count on the postal service to get the payment to the bank in a timely manner, send the payment early to be safe.  Remember that until the new laws are being enforced you’re still subject to universal default, so that one late payment could cause the interest rates to go up on all your cards.
    • Along with the obvious pay on time, there’s also stay under your credit limit.  Over limit fees and the increased interest rates are only getting worse and worse, so do your best to avoid them completely.
    • Pay in full to avoid interest.  Credit cards should be used as a convenience, not a replacement for income, so if you’re spending within your means this should be easy to do.  If you’re not living within your means, it’s time to draw up a reasonable budget and figure out what it’s going to take to get your finances in check.
    • If you find yourself using your cards more than you should just to make ends meet, don’t be afraid to ask for help.  Feel free to give our experts a call at 1-888-WHY-FICO.  We can give you the unbiased advice based on our experience that will help you get on track.

The credit card companies find new ways to make lemonade

Part 1 of 2

Banks are evilI’ve spoken a lot recently about what credit card issuers are doing before the Credit Card Reform Act goes into effect next February. They’re justifying their practices by saying that their revenues are suffering with the ever increasing unemployment and default rates. Sadly their solution is to penalize the paying customers. Here’s a list of specific things to watch out for in handy “10 things to watch out for” format.

• Increasing interest rates. The phrase of the day with the card issuers seems to be “any time any reason” price changes. This isn’t just happening to sub-prime customers either. One of the major banks just raised the interest rate on their low risk prime cards to 29.99%. Interest rates like this have been ridiculous in the past even on sub-prime cards. Rates for sub-prime cards are even worse.

• Penalty rates are going up. Those are the rates that are put in place if you’re late, go over your limit, etc.

• “Unprofitable” accounts are being shut down or getting their limits reduced. In other words, people that pay their cards off each month, denying the card issuers interest and penalty fees, are being closed down. The issuers want to keep the people that carry balances and are late here and there.

• Cash advance and balance transfer fees are skyrocketing to all time highs. The days of no cost, 0% interest balance transfers are long gone, and those “convenience” checks are going to significantly increase the real cost of your purchases.

• Annual fees are being added and increased. Last year less than 20% of credit cards had annual fees, but it’s predicted that by February nearly all credit cards from the big banks will have them. The cards that already had annual fees are seeing them doubled, tripled, even quadrupled.

• Fixed rates are being changed to variable rates. In the past with fixed rates meant that if the prime interest rate went up your rates remained the same, decreasing the profits of the banks, but now if the historically low prime interest rate goes up (which it will since it can’t really get any lower), your rate will go up. If prime is 3% and your rate is prime +24.99%, and prime goes to 6% your rate goes to 27.99% instead of staying at 24.99%. Oh, and the best part, there’s no provision for the rates to go back down. So if prime goes back to 3%, your interest rate doesn’t go back to 24.99%.

• The banks are changing the terms of their special fees to make them all inclusive. For example, banks charge a special fee for “international transactions” in other forms of currency, but they’re changing the terms so those fees apply even when the transaction is still in American greenbacks.

• They’re making rewards an endangered species. Cash back rewards are being lowered or eliminated while things like airline miles are getting tougher restrictions making it harder, if not impossible, for people to use them.

• The banks are getting creative and creating new fees in addition to the old ones. Not using your card? Here’s an inactivity fee. Not using it enough? Have a low activity fee.

• The banks are closing cards with no notice. That’s means you might not even know until you go to use the card and your transaction is embarrassingly declined.

I’ll follow this up tomorrow with some suggestions on how to protect yourself.

Credit Unions & Big Banks

With the meteoric rise in credit card interest rates and the plummeting credit limits I often wonder why more people don’t turn to credit unions for their credit needs. There was a time when going through the big banks for credit cards made a lot of sense—back when they’d offer no interest on balance transfers for 12 months or more, or when their incentive programs were actually a savings compared to their rates. Those days are long gone though as the big banks offer less and less attractive rates and incentives by the day.

The advantage to credit unions is that they are, technically, nonprofits run by their members. This means they can offer interest rates and fee schedules far below those offered by the big banks (you know, the for profit ones). Many might contend that credit unions have membership limitations, such as you have to work for a certain company or live within a certain geographical area. In my experience, and I’m speaking as someone who has dealt exclusively with credit unions since I opened my first passbook savings account over 2 decades ago, the membership limitations they have always contain loopholes. If you go in and tell them you want to open an account, they’ll find a way. They’ve earned my loyalty over the years, and I’m not speaking of any one particular credit union because I have opened accounts at 6 different ones due to relocations, because they have universally offered me better interest rates on car loans, home loans, checking accounts, lines of credit, and credit cards. In addition they have just plain treated me better, like a valued customer and not just a number.

I found a chart in a recent Pew Report that shows clearly the differences in rates between the big banks and your average credit union. Look it over and keep them in mind if you’re looking to minimize the amount you pay in interest, fees, and penalties.

Banks versus CUs

Did Congress Include A Poison Bill in the Credit CARD Act?

credit-cards width=By Eva Norlyk Smith, Ph.D.

The Credit CARD Act signed into law in May of this year aimed to protect cardholders from unfair and abusive credit card practices. Unfortunately, as most all cardholders know first hand by now, credit card companies have been raising interest rates aggressively in advance of the enactment of the new law, in an effort to minimize the impact of some of its provisions.

Well, there may be good news. If your interest rate has been raised anytime after January 1, 2009, credit card companies could be required to lower the interest rate back down, once an important new provision of the new Credit CARD Act steps into effect.

Congress put a bit of a poison pill into the Credit CARD Act, a.k.a. section 101(c). The section requires credit card companies to regularly review interest rate increases they make on credit cards, and lower rates back down, if the cardholder’s risk profile or general market conditions have improved. The interest rate reviews will step into effect in August 22, 2010. Most significantly, the reviews are to include credit card interest rate hikes dating back all the way to January 1, 2009.

Credit card companies are further required to set up and maintain “reasonable methodologies” for the interest rate review, and undertake reviews at least every six months. Based on the review, if any risk factor has declined, the card issuer shall reduce the annual percentage rate previously increased. Card issuers will also be required to provide a written notice of future interest rate increases, including a statement with the reasons for the interest rate increase.

That is the good news. The bad news is that the law leaves plenty of uncertainties. Most notably, it says nothing about how much the interest rate reduction should be, or whether credit card companies will be required to reset interest rates to their previous levels. It also leaves out any discussion about which criteria card issuers should use to go about determining what constitutes “reduced risk.”

These specifics and other details of how 101(c) will be implemented are left to the Federal Reserve Board to determine, as the nation’s primary financial regulatory agency. The Fed is required to issue rules for how the interest rate reviews are to be conducted by February 22, 2010, six months before the interest rate reviews become effective.

Disturbed by the recent interest rate hikes on credit cards, Senator Chris Dodd, Chairman of the Senate Banking Committee, recently sent a letter to Fed Chair Ben Bernanke along with the heads of key regulatory agencies. In the letter, Dodd called on the Federal Reserve Board to provide tough, clear specifics for what would be required by the interest rate reviews. He further called on the agencies charged with enforcing the Credit CARD Act to hold the credit card companies strictly accountable for conducting thorough reviews and decreasing rates.

Dodd asked Fed Chair Ben Bernanke to immediately notify credit card companies that they will be held accountable for all interest rate increases since January 1, 2009, and will be subject to the review requirement once it takes effect.

According to Senator Dodd, the January look-back provision was designed expressly as a means to deter card issuers from raising interest rates before the provisions of the Credit CARD Act take effect. “However,” Senator Dodd states in his letter to the Fed Chair, “the look-back provision will serve as a deterrent only if it will be implemented and enforced effectively.”

In view of the aggressive rate hikes that have hit consumers over the last six months, Section 101(c) could turn out to be one of the more important parts of the Credit CARD Act. Whether or not the regular interest rate reviews will have any teeth, however, will ultimately boil down to the criteria the Fed Reserve Board lays out for conducting the reviews and determining how much interest rates should be lowered.

We won’t know the details about that until the Fed issues the guidelines for interest rate reviews, sometime on or before February 22, 2010. After that, there will be a required public comment period, during which the public—and that means you and I—will be able to weigh in on whether or not the rules for interest rate reviews deliver on the intention of the law: to protect consumers against arbitrary and unreasonable interest rate increases.