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Credit Assistance

Posted by: Staff Writer | May 22,2008

Major Types of Credit Assistance

Everyone who has a credit card has some problems with debt.  That’s just how credit cards work: as soon as you make a purchase, you’re in debt, no matter how small that purchase may be.  Due to the ease-of-use of credit cards, many people are getting quickly into debt, much faster than they had anticipated.  There are also problems with identity theft and credit card fraud.  While credit cards offer an opportunity to pay for purchases in installments, there are also problems that arise from using credit cards. 

Calculating Debt

The main problem with using credit cards is one thing: debt.  You may never have a problem with identity theft, but debt problems are going to be a given.  What do you do if you run into problems with debt?  There are a number of debt relief options at your disposal.  First off, you need to accurately look at your budget to get an accurate view of your overall debt picture.  

Calculate your monthly income and subtract this figure from all of your monthly payments:

•    Credit cards
•    Mortgage/rent
•    Student loan
•    Car loan
•    Utilities
•    Food
•    Health insurance
•    Other insurance
•    Property taxes

For each borrower, the list of costs will be different.  Calculate your entire debt portfolio.  This means compiling all your recent bills.  The resulting figure should not be a general number, but an accurate view of what you owe every month.  Your credit card payments will go up every month, unlike a debt like a mortgage that will remain static, so you should factor this into your projected debt equation.  

Next, factor in all miscellaneous expenses.  This is a bit harder to get a handle on.  If you have old receipts this is ideal, but otherwise you should try and reach a general figure for all entertainment-related expenses

•    Movies
•    Books
•    Music
•    Video games
•    Eating out

Again, everyone has different entertainment expenses.  You should factor in all purchases you make throughout the month, no matter how small.  Take a cup of coffee every day: $2.00 for every workday may result in a $40 monthly bill.  You may be surprised about just how fast these miscellaneous expenses add up.  You can only get an accurate accounting of your overall income vs. debt to calculate just how much you can afford every month.  Always set aside some money for savings, if possible.  The type of debt relief program you use will depend on how dire your situation may be. 

Credit Problems

If your only problem is that you’ve got a limited credit history, your job is easier.  All you’ve got to do is sign up for a credit card.  These are much easier to secure than other types of loans.  There are credit cards available for people with limited credit.  These cards may have higher interest rates, but you have to start somewhere.  Prepaid credit cards, which require a deposit, are also a good credit card for first-time borrowers.

If you’re problem is excessive debt that is not met by your income, you have several options at your disposal.   

1.    Credit Counseling: These services offer to negotiate with your creditors to either lower interest rates, lower the amount of debt payments, or both.  Keep in mind that these can be of varying quality.  The negotiation has to be recognized by the creditor, or else the new lower payments will register as a default.  In addition, credit counseling can end up on your credit report.  
2.    Consolidation: A way to combine your debts into one payment.  Often this is done through a home equity loan.  An equity consolidation pays off all your outstanding debts by borrowing off of equity and then the borrower pays off the new loan, potentially for a lower amount than the debts were previously.
3.    Debt settlement.  Another form of negotiation, which is different than counseling.  In debt settlement, the creditors agree to a lower payment, so long as the debt is paid all at once.  The second settlement option is a type of negotiation so that you face a smaller debt burden.  Debt counseling and debt settlement are often confused as they can be a similar system.  

These three options are for when debt problems have gotten seriously out of control.  If you are only having minor debt problems, the main recommendations is to pay off high-interest debt first.  Normally credit cards have higher interest payments than other types of loans.  In addition, credit cards have higher fees.  You want to get these payments out of the way first. 

Rebuilding Credit

If you’ve been through any of the above situations, you more than likely have a low Fico score to show for it.  It sounds overly simple, but the surest way to repair your credit is to pay off your bills.  While you need to pay off high-interest credit cards first, this is not at the expense of avoiding other debt payments.  What that does mean is paying well above the minimum for high-interest credit cards while funneling minimum payments to other loans.  

As it’s easier for bad credit borrowers to secure credit cards, this is the best option for a credit repair scheme.  However, this should be done one at a time.  Applying for five credit cards all at once can actually make you look like a credit risk to creditors, so each subsequent card is going to have higher and higher rates.  Instead, start with one credit card, pay it off in full every month – or at least keep the balance very low – to start establishing a more responsible credit history. 

Credit Rating

Your credit rating, or Fico score, is determined by a lot more than your history with credit card payments.  Other things that affect your credit rating are mortgage payments, student loan payments, car payments, bankruptcies, and a lot more.  However, your credit rating will have a direct effect on the quality of credit card offers you will be able to secure.  People with a high credit rating – 700 or above – will be able to qualify for a credit card with a low APR, at least 10% and below.  People with average credit can expect an APR in the 15%-20% range.  This is important to mention because even if you find a great credit card offer with attractive terms, you will not be offered the advertised rate if you have poor credit. 

Getting a Good Credit Card Plan

Whether you’re trying to rebuild credit or you’ve got a stellar credit rating, you’re going to want a credit card with the best possible terms available.  Remember, don’t just look at the introductory offer.  Aside from balance transfer situations, where you are transferring a balance specifically to pay off debts, the non-introductory is most important, as this is the APR you’ll have for the bulk of your time with the card.  Look for cards with a low:

1.    APR: The interest on purchases
2.    A long Grace Period: the time before you’re charged interest on purchases
3.    Fees: Extra money you’ll have to pay every month.  The most common examples of fees include Annual, Over the Limit, Online Payment, Late Payment, Balance Transfer, and Universal Default.   

Even people with great credit can be subjected to a number of fees so steer clear of fee-heavy cards when signing up.  Rewards programs, in which cardholders get points for each dollar put on the card, are also recommended. 

Identity Theft and Credit Card Fraud

Sometimes you do everything right and still you have to pay a price.  This is the case with identity theft and credit card fraud, both growing problems.  To avoid both, you should:

1.    Never give out private information, such as credit card number, Social Security Number, and PIN, unless you’re in contact with a trusted organization.  
2.    Shred all financial documents or keep them in a secure place.  
3.    Always be aware of how your credit card is used and try to never keep it out of your site.  
4.    Protect your computer using anti-virus, anti-spyware, and firewall software.  

If you are the victim of credit card fraud, you should contact your card issuer immediately and cancel your cards.  You may also need to cancel your bank account, cancel utilities, and apply for a new license or passport for a serious case of identity theft.  After any identity theft or fraud attack, you should order up a copy of your credit report to begin clearing your name.  Everyone should monitor their credit report on a yearly basis to make sure that nothing has been done to their credit standing without their knowledge.  

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