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Guide to Credit Management

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Managing Your Credit

It seems one can no longer live in modern society, certainly not in America, without credit cards. Your social status appears, at times, to be measured by the number and type of credit cards you carry: The more you have, especially if they are platinum, the wealthier you appear.
    Appearances, we all know, can be deceiving, and often are. Worse yet, you can be deceiving yourself.
    In reality, the number of credit cards in your wallet says nothing about your wealth. All it says is how much debt you are capable, and perhaps willing, to incur.

    Now, don’t get me wrong. I am not opposed to credit cards. They are very useful tools. But they must be managed properly.
    Just remember, every time you flash a credit card or say “Charge it!” you are taking a pre-approved loan. This can either lead to prosperity, or to disaster. What it does to you depends on one and only one thing: Your attitude toward credit. People who understand how credit works usually have a constructive attitude. Those who do not, typically head for serious trouble. And when they get there, most do not know how to recover.

    To understand credit, we need to know about compound interest. Interest is compound because when added to the principal, interest becomes principal.
    To illustrate this, consider putting $100.00 in an account that earns 2% annually. For simplicity sake, we will assume that this 2% is added once a year (or compounded annually in technical terms). We will also assume that we put the $100 into the account on the first day of the year.
    At the end of the year, the financial institution will add 2%, or $2.00, to the principal. Now we have $102.00 in our account.
    If we keep it there for another year, we will receive another 2%, not of the original $100.00 but of the $102.00. Remember, once added, interest becomes principal. So we earn $2.04 (102.00 x 0.02), and have $104.04. The year after that, we earn $2.08 (104.04 x 0.02 = 2.08).
    Each year, the interest added to our account increases slightly. Or, more exactly, it increases through a geometric progression. Just how fast does it grow? That depends on the annual percentage rate. The higher the rate, the faster it grows.
    Now, to the important part. As I mentioned, interest progresses geometrically. That means if you double your interest rate, your interest will grow four times as fast, not two. If you triple it, it will grow eight times as fast, not three.
    And if you have a credit card with an 18% APR (annual percentage rate)? Well, figure that one yourself! (You’re on the Internet, you’re smart.)

    Another useful way to look at this is to figure out how fast (or painfully slow) it takes for your money to double. Surprisingly, there is a simple way to calculate the answer: the rule of 72, attributed to Benjamin Franklin (not to be confused with 42, that’s Douglas Adams).
    The rule says:

To find out how many years it takes for your money to double, divide the annual percentage rate into 72.

    It works for any time units: Divide the daily percentage rate into 72 to find out how many days it takes for your money to double, and so on.
    So, if you keep your money in a 2% percent account, it will double every 36 years (ouch!). If you owe money on an 18% credit card, your debt will double every four years (screech, grind, !@#$!!!).
    Rule of 72 is so incredibly simple, that when I first learned about it, I did not believe it. I wrote a computer program which calculated the exact time for the money to double and compared it with the time calculated by the rule of 72. I tested it on an increasing scale from 1% to something like 72%, and yes, it works. There was a negligible margin of error.
    On a funny note, the other day I was enquiring about some government securities at my local bank, and was told I could buy a $100 bond for $50, and cash it in in twenty years (yeah, right!). I replied without hesitation: “Only 3.6% APR?” The teller was visibly impressed. :-)

    Now, back to credit cards. Considering a credit card company can charge 18% (and often more), you can see how improperly managed credit will absolutely positively, without hesitation, lead to complete financial failure. And for majority of people it does. Incidentally, that does not mean those people are stupid. It means they are uninformed!
    Someone told me that if you charge $1000 on a high-interest-rate credit card, and make your minimum monthly payments, you will pay it off in 35 years. And that’s only if you do not keep charging. In this case, I did not write a computer program to test the claim, but the person was a professional financial advisor. I took his word for it.
    And of course, most people who do make just the minimum payment keep charging, so they never realize how deep they are sinking!

    At this point, you may be wondering: “Why would anyone who understands this want a credit card?” The answer is simple: First of all, you probably need one. If you want to buy something online, you need a credit card. Of course, now that debit cards are becoming more common and are developing similar anti-fraud measures credit cards have enjoyed for a long time, you may not really need one as much as you may think.
    More importantly, though, credit cards are useful. You may, for example, find yourself in an emergency situation when you really need to obtain some service and do not have enough cash on you. A credit card will be very handy.
    And then, it is a matter of convenience: You may want to borrow money to purchase something now and pay for it later. As long as you pay it off fast, it may be worth spending some extra money. Just make sure you are capable of paying it off fast.
    Using a credit card can even make you money. If you do have the money for things you need or want, and place it in an interest bearing account, and pay off your bill in full every month, you are earning some interest. This is one of few ways of getting an interest-free loan.
    A final reason for having a credit card is to get (and keep!) a good credit rating. You might think, what do I need a good credit rating for if I never borrow money. Strangely enough, some companies check your credit rating before hiring you. And if you want to be able to accept credit cards for your business (online or off), again, most banks will turn you down if your credit rating is not up to par (the reason for this escapes me, but that’s the way things are). Fortunately, some financial institutions are now willing to offer merchant accounts with small businesses whose credit rating is not too good (see below, in the reference section).

    How many credit cards do you need? Usually just one. The exception would be for people who travel around the world and need a MasterCard here, a Visa there, an American Express card yet elsewhere. But then again, you only need one of each. Ideally, you’ll have a single credit card with a low interest rate, no annual fee, and a reasonable credit limit.
    Realistically, you can get that only with a perfect credit rating. If you cannot get that, then shoot for no annual fee if you pay off your bills in full every month, or for a low rate if you do not. Alternately, get two cards: One with no annual fee for regular purchases you will pay off every month, one with low interest rate for occasional other purchases.
    Having too many credit cards can also hurt you if you need to take a regular loan or mortgage. You may think that having much credit available and all paid off will impress potential creditors. But the problem is that even if you do not owe much on all your cards, there is the possibility that you will start charging too much after you have obtained a loan or mortgage, and become unable to pay.

Debt Counselors of America - Debt Counselors of America is a non-profit organization which assists consumer to get out of debt. Lots of free items and assistance is available. Chat room, forums, online publications, staff experts and call-in radio show.

    What if you “cannot” get a credit card? I tell you one thing: If you live in the United States (which is where I live—I cannot know how the system works in every country, indeed many countries do not even have credit cards), so, if you live in the United States, you can get a credit card, no matter what your past history—or lack thereof—is.
    You may not get the ideal card (no annual fee, low interest rate, high limit), or you may have to wait a couple months (if you are going through bankruptcy right now, you probably have to wait until it is discharged; or if you are unemployed, you may have to get a job, or start a profitable business—something you should do anyway). But you can get a credit card.
    In fact, if you belong to this category, you should, in my opinion, get one fast and start building or re-building your credit rating.
    See, there is something called secured credit. The way it works is: You make a deposit in a bank (or some other financial institution) and contract to keep it there. Then the bank will issue a credit card. Your limit may be the same as your deposit (so, essentially, each time you charge you are borrowing your own money). Or your limit may be 80% of the deposit. Or 150%, or sometimes even 500%. You may even be able to get a completely unsecured card over the Internet (see below in the reference section).
    Some of secured cards have a high application fee, or a high annual fee, and just about all of them have a high APR. But if you are serious about building or re-building your credit rating, you should think of it as the cost of getting a good rating. You should, of course, still go for the best deal you can get. Even some of the secured card offers may turn you down, but somebody will give you secured credit.
    You may also have to start with a secured loan first: You deposit $500 and borrow it back, then pay it off over a year or so. Generally, small community banks are more willing to do this for you since they have fewer customers, and the loan officer has more power of approval. It is much harder for a loan officer to turn you down than it is for some committee. After all, if you are smart, you see the loan officer on a regular basis. Once you have paid off the loan, you have something positive on your credit report, and you will even start getting offers for secured credit cards in the mail.
    Here is a tip for increasing your chances of getting such a loan: Level with the loan officer. Tell him or her: “I don’t really need this loan. I just want to (re)build my credit rating.” The words “I don’t really need this loan” are a magical formula. Lenders are much more willing to give you a loan you do not need. They will invariably turn you down if they feel you desperately need the money (since you may not be able to pay it off).
    Whichever way you arrive to obtaining a secured credit card, if you keep paying on time—which you absolutely positively should—they will eventually raise your limit, lower your interest, return your deposit, or all of the above. And if they do not, others will be willing to offer you an unsecured card, and you can simply close the secured account.

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Accepting Credit Cards

When dealing with merchant accounts, you need to learn a “new language.”
    Click here for a GLOSSARY OF MERCHANT TERMS. Then click on your browser BACK button to return here.

Just because you may be living outside the United States does not mean you cannot accept credit cards from American customers on the Internet.
    While you cannot do so personally, you can form a fully owned US corporation, which in turn can accept credit cards. For more information, click here.

If you are doing any kind of business on the Internet, you simply must accept credit cards. If you expect people to read about your product on a web site and then send you a check, that just won’t happen. Exceptions are possible but rare. Most people will continue their browsing and forget about your product when done. Of course, you should still be willing to accept checks from people who do not have a credit card.
    Several years ago this was a major problem. Banks were unwilling to let you accept credit cards over the Internet. Even plain mail-order companies had hard time obtaining a merchant account, let alone Internet businesses. The perception was that Internet was an unsafe place for credit cards: People believed that credit card numbers were easy to steal on the Internet. In reality, shopping over the Internet is safe, indeed safer than, for example, shopping over the phone. It is particularly safe when using a safe server. But bankers did not know it.
    Oh, let’s face it: Most bankers still don’t know it. But select few are enlightened and offer merchant accounts to Internet businesses, even small, home-based, ones, and even regardless of your personal credit history. And, of course, these banks let you apply for their merchant account right over the Internet. And since all you need is one such account, I say: Don’t even bother with your local bank. Just go to the reference section below, click on the links, find your best deal, and apply for it.
    What do I mean by best deal? Well, the service costs you money (why else would the bank want to offer you the service—like any business, banks want to and should be paid for their services). The bank will take a percentage of whatever amount you are paid by credit cards, they will charge a monthly fee, a setup fee. Plus, you will need to buy some kind of software to handle the transactions (or write it yourself if you know how). The percentages and fees vary from bank to bank. What is the best deal for you depends on your needs.

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Well, this is the Internet. So, rather than just make a reference listing, I have added banners which will get you straight to the referred-to sites.
    Here you can apply for various credit cards. Some are the ideal cards for people with perfect credit rating, others are good for building or re-building your rating. One link goes to a site that will not issue a credit card but will search the net for a nominal fee and find two credit card providers which, they guarantee, will give you a credit card, or your money back (this is their guarantee, not mine: I have not tried their service—I already have a credit card, and I only need one).
    If you are over your head in your bills, you are not alone: Millions of Americans have problems paying their bills. Fortunately, help is available from several non-profit organizations. One of them, Debt Counselors of America, is only a click away. Their web site is filled with useful information. I placed a link to the site in one of the sidebars above, but if you missed it, you will find it in this section again.
    Finally, you will find links that will allow you to apply for a merchant account.

One thing you will not find here is a link to anyone who offers to accept credit cards on your behalf. I have seen such places heavily advertised on Webaholics, and unwittingly followed several such links.
    These people promise to save you monthly fees. They suggest that rather than getting a merchant account for yourself, you can use their merchant account. In other words, they promise to accept credit cards for you.
    Every single link of this type I have “clicked through” brought me to a free web page, such as at GeoCities or AngelFire.
    BEWARE OF THESE OFFERS! They stink of SCAM. Why? For several reasons: Free web page providers, such as GeoCities, prohibit the use of their free web pages for business purposes. These people have no qualms about breaking their host’s policy. Besides, what legitimate credit card service provider cannot afford to have its own web site (which can be had for as little as $8/month) with its own domain ($35/year)???
    More importantly, using someone else’s merchant account for you is AGAINST THE LAW. Chances are these people will indeed accept payment on your behalf, but never transfer the money to you. And since anyone can get one (actually, any number) of the free web pages by filling out an online application, in which they can enter a fake name and address, if these people take your money and disappear, they are virtually untraceable.

Debt Counselors of America


Credit Card Processing Services and Equipment

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