CREDIT & DEBT MANAGEMENT

Maintaining good credit allows individuals to take advantage of lower interest rates and rapid access to funds when an appropriate need arises. On the other hand, if you have a less than excellent credit rating, you will pay higher rates and have difficulty obtaining new credit. This can be especially harmful if you wish to buy a home or start a business. The information provided here is to assist in safeguarding and improving your credit.

Identity Theft and Your Tax Return

You should be very cautious about being duped by Internet identity thieves. We want to remind you about this fast-growing threat and how to protect yourself from being a victim and avoid the immense amount of trouble and aggravation that accompanies identity theft.

As the tax-filing season approaches, the identity thieves are gearing up with tax scams to sucker you into providing them with your identity information, which they can then use to charge against your credit cards, tap your bank account, steal your tax refund, file a fraudulent tax return in your name . . . the list goes on and on.

These thieves are clever, and some even disguise e-mails to look as if they come from a government agency; the IRS banner has been used in many scams to steal taxpayer identities. For example, you may receive an e-mail with the IRS banner indicating that you have a refund coming and directing you to a web site where you are duped into revealing your identity to obtain the refund. During the holidays, scammers were sending out e-mails disguised as being sent by major department stores - you may have received one indicating that you had won a gift card and asking you to reveal your financial information to receive the gift card.

The scams, known as phishing, have one goal: to trick you into revealing your personal and financial information. The scammers can then use that information - such as your Social Security number, bank account, or credit card numbers - to commit identity theft or steal your money.

Here are some tips you should know about phishing scams:

1. The IRS never asks for detailed personal and financial information such as personal identification numbers (PINs), passwords, or similar secret access information for credit card, bank, or other financial accounts.

2. The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:
  • Do not reply to the message.

  • Do not open any attachments. Attachments may contain malicious code that will infect your computer.

  • Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides additional resources that can help. Visit the IRS website  and enter the search term “identity theft” for additional information.
3. The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site.

4. If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS but you suspect he or she is not an IRS employee, contact the IRS at 1-800-829-1040 to determine whether the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward suspicious e-mails to phishing@irs.gov.

If you have any questions or doubts related to a letter, phone call, or e-mail from the IRS or other taxing authorities, please call this office before responding or providing any financial or personal information. Better safe than sorry!

Paying Off Debt the Smart Way

Being in debt isn't necessarily a terrible thing. Most people are, between mortgages and car loans and credit cards and student loans. Being debt-free should always be a goal, but you should focus on the management of it, not the presence of it. It'll likely be there for most of your life, and if you handle it wisely, it won't feel so much like an albatross around your neck.

There are alternatives to shelling out your hard-earned money for exorbitant interest rates, and to always feeling like you're running behind and on the verge of bankruptcy. You can pay off debt the smart way, while at the same time saving money to pay off even more, faster.

Know Where You Are
Assess the depth of your debt. Write it down, using pencil and paper or computer software like an Excel spreadsheet or Quicken. Include every financial situation where a company has given you something in advance of payment, including your mortgage, car payment(s), credit cards, any outstanding tax liens, student loans, and payments on electronics or other household items through a store.

Record the day the debt began and will end (where possible), the interest rate you're paying, and what your payments typically are. Add it all up, painful as that might be. Try not to be discouraged; you're going to break this down into manageable chunks, and find extra money to help pay it down.

Identify High-Cost Debt
Yes, some debts are more expensive than others. Unless you're getting payday loans (which you shouldn't be), the worst offenders are probably your credit cards. Here's how to deal with them.

• Don't use them. Don't cut them up, but put them in a drawer and only access them in an absolutely dire emergency.

• Identify the card with the highest interest and pile on as much extra money as you can every month. Pay minimums on the others. When that one's paid off, work on the card with the next highest rate.

• Don't close the card account, and don't open any new ones. If you do, this probably won't help your credit rating.

• Pay on time, absolutely every time. One late payment these days can lower your FICO score.

• Go over your credit-card statements with a fine-tooth comb. Are you still being charged for that travel club that you've never used? Look for line items you don't need. Then take steps to cancel those “services.”

• Call your credit card companies and ask them nicely if they would lower your interest rates. It works sometimes.

Save, save, save
Do whatever you're able to do to retire debt. If you take a second job, earmark that money strictly for higher payments on your financial obligations. Substitute free family activities for high-cost ones; your local library may have cheap or free tickets to events. Sell high-value items that you can live without.

Bag Unnecessary Items to Reduce Debt Load
Do you really need the 800-channel cable option, or that dish on your roof? You'll be surprised at what you don't miss. How about magazine subscriptions? They're not terribly expensive, but every penny accounts. It's nice to have a library of books, but consider visiting the public library or half-price bookstores until your debt is under control.

Don't ever, ever miss a payment
You're not only retiring debt, but you're also building a stellar credit rating. If you ever decide to move or buy another car, you'll want to get the lowest rate possible. A blemish-free payment record will help with that.

Besides, credit card companies can be quick to raise interest rates because of one late payment. A completely missed one is even more serious.

Do Not Increase Debt Load
If you don't have the cash for it, you probably don't need it. You'll feel better about what you do have if you know it's owned free and clear.

Shop Wisely, and Put the Savings on Your Debt
If your family is large enough to warrant it, invest $45 or $55 and join a store like Sam's Club or Costco. And use it. Shop there first, then at the grocery store. Change brands if you have to and swallow your pride: Use coupons religiously. Calculate the money you're saving and apply it to your debt (i.e., increase your debt payment by the amount you’ve saved).

Each of these steps, taken alone, probably doesn't seem like much, But learn to live this way, adopting as many of them as you can, and you'll be able to watch your debt decrease every month.

How to Improve Your Credit Score

There are myriad important numbers in your financial world, but few as critical as your credit (FICO®) score. This FICO® number, ranging from 300-850, can affect your ability to buy a house or car, get a credit card or other loan, or even get a job sometimes. Your FICO® score also affects the interest rates on loans.

FICO® scores are based on your credit reports. Credit agencies track credit history and sell it to parties who are interested in your credit-worthiness. Credit reports consist of four elements:

• Personal information (compiled from credit applications)
• Credit history (details of your credit relationships)
• Credit report inquiries (entered anytime someone views your record)
• Public records (judgments from government sources, like liens)

Three agencies track credit scores: Equifax, Experian, and TransUnion. You're entitled to a free report once every 12 months; the best place to get this is AnnualCreditReport (www.annualcreditreport.com). You can:

• See who's been making inquiries about your credit

• Check it for errors

• Find out if you're an identity theft victim

• Gauge your chances of getting a loan

A bad credit report doesn't have to follow you forever. Even bankruptcies generally drop off after seven years. If your score is less than optimal, you can improve it. Stick with your program and you'll increase your chances of--eventually--getting into that top 5%, or even 1%.

• Report mistakes immediately to the appropriate credit agency. Do this in writing, and document it well.

• Pay everything on time. Even one late payment on a credit card can lower your credit score.

• Budget your credit card payments. They should be as much a part of your budget as your mortgage and food.

• Don't let balances on your revolving credit accounts--like credit cards--get too high. Having a high credit debt-credit limit ratio can lower your credit score.

• Neither close your unused accounts nor open new accounts to affect your credit score. That trick doesn't always work.

• Pay off the cards with the highest interest rate first. No matter what the balance, you should always pay any extra you have on the card that's costing the most. Pay minimums on the rest. When you have that top card paid off, continue the process with the second in line, and so on. Whenever you can, pay more.

• Keep an emergency reserve so you can always pay at least minimums on time. Don't be intimidated by this. If you can't save thousands of dollars, at least squirrel away a few hundred earmarked for this occasion. Skip purchasing a couple of lattes every paycheck and bank it. 

• Ask your credit card issuer for a lower rate. This actually works sometimes, so it's worth a try. Credit card interest is simply lost money.

• Use your credit cards occasionally and carefully. Show that you can borrow money and pay it back responsibly.

• Don't be a ostrich. The credit bureau can't gauge your ability to pay a debt back if you don't ever borrow any.

• Try to maintain a stable job and residence. Lenders are more interested in people who show stability in their personal lives.

• Avoid--like the plague--collection agencies and judgments against you. When you've satisfied a lien, be sure to check that the lien has been released and report that to the three reporting agencies if necessary.

What happens if your credit is really in shreds? Double your determination and keep following your program. If you can't get a traditional credit card, get a secured credit card, where you make a cash deposit and can charge up to that limit. Pay it off faithfully, and you'll probably eventually get credit again.

In the meantime, save as much as you can so you don't trash your credit again. Consider asking someone to co-sign a small loan so you can prove you're worthy of credit.

When you are, shop for your credit cards like you shop for groceries and clothing, to find the best deal. Bankrate.com (www.bankrate.com) is a good place to do that. That's a good site for finding the best deals on other financial products, too, like mortgages and other loans.

Improving your credit score will likely take time and some sacrifice on your part. But it's worth it, and it'll save you money eventually -- the higher the FICO score, the better your chance of credit and loans, and the lower your interest rate may be. So keep plugging towards the payoff.

Solutions for a Personal Credit Crisis

It can happen any number of ways. You can lose your job. Have an expensive medical emergency. Find yourself with three children in college. Be an adult during a national financial crisis. Whatever causes it, you may find yourself in crisis mode money-wise, and need some quick solutions.

There are a number of ways to get through it, to see light at the other end. But it'll take assertiveness and perseverance, and you will have to make some sacrifices. Here are some suggestions.

• Be proactive, not reactive. Start working on the problem when you see it on the horizon, not when you can't bear to answer the phone or open the mail for fear of a bill collector.

• Assess your situation. And take enough time to do it thoroughly. Record your regular expenses and liabilities. You can do it on paper, in an Excel spreadsheet, or in a personal finance program or Web site. Pick one system and stick with it, so all of your planning will be coordinated.

• Build a budget. Based on that information, create a budget you can live with using paper and pencil or computer software.

• Write down everything you spend. Everything. Then compare this regularly to your budget.

• Calculate the money that will come in every month and everything that's due every month, quarter, and year.

• Identify payments that must be paid in full. This probably includes things like your mortgage or rent, utility bills, and insurance payments.

• Contact creditors and negotiate short-term payment reductions. Of course, you can't do this with everyone, or maybe even the majority of your creditors. But you can, for example,  try to refinance or consolidate student loans, get the interest on your credit cards lowered, and set up budget plans with your energy company.

• Scale back on expenditures where possible. Do you really watch all 800 channels on your cable system? Cut back to basic cable. Go to the library for books and DVDs. Take advantage of resources like Mary Hunt's Debt-Proof Living columns. Use coupons, visit garage sales and Goodwill for clothes and household goods, and avoid high-end groceries and restaurants. You don't have to go into austerity mode, but cutting back $10 here and there will add up.

• Do not increase your debt. You don't have to cut up your credit cards, but put them in a drawer and don't use them unless you have a dire emergency. Concentrate on paying them off.

• Consider a credit card balance transfer. But only do so if you're sure you can pay off the balance in the stated time period.

• Save $1 a day on something and bank it. Apply it to a credit card, put it in savings, or use it to buy something you need and have been avoiding buying.

• Consider adjusting your retirement deductions. This should be way down on your list. 401(k)s and such are too important to skimp on unless you absolutely must.

• Ask your doctor about switching any medications to generics.

• Do not rob Peter to pay Paul. For example, do not use credit cards to buy groceries or pay bills.

• Save on energy. Raise or lower thermostats more than you usually do. Combine car trips where you can. Use the vehicle with the best mileage whenever possible. Have your furnace tuned every year. Use cold water in the washing machine.

• Make gifts instead of buying them. It'll save money and mean more to the recipient.

• Adjust your tax withholding. If you're getting a refund, you're giving the government a loan. Adjust your withholding at work to decrease your estimated payments, and you can use that money now.

• Evaluate your phone service. Do you know what extras you have, and do you need them? Can you get by with just your cell phone and drop your land line? If your contract is nearly up and you don't use the phone much, consider a prepaid cell phone.

Any one of these ideas taken alone wouldn't seem like it would save enough money to make it worthwhile. But do enough of them, and you'll probably be surprised how much you can save. Use that savings to retire debt, and you'll eventually have enough money to spend on things you've been avoiding. But try to stay out of debt and in the money.

What Happens When I Default on a Business Loan?

What does it mean to default on a loan?

A loan default is the failure to meet the financial obligations indicated in the loan agreement that is signed by you and your lender. Often, a loan default translates into the business owner's inability to pay their debts on time. Due to the differences in each loan agreement, default penalties vary. However, the effects of defaulting on the loan fall into two general categories- immediate repercussions and future implications for both you and your business.
 
What are the immediate effects to my business if I default on a loan?

Drop in business and/or personal credit score. Missing your payments and defaulting on your loans negatively impacts your business credit score. Your personal credit score may be affected, depending on the type of business structure that you have in place. 

Increased interest rates. Your business interest rates (and possibly your personal interest rates) may increase if your credit score dips. Depending on your loan agreement, a higher interest rate could affect the loans that you currently have, as well as future loans you plan to seek.

Foreclosure or seizing of property and collateral. Foreclosure may be the most severe repercussion due to a loan default, allowing lenders to recuperate losses from loan defaults. In this situation, your lender will have the full right to take control and ownership of your property and collateral that you have included in your contract. They normally will sell your property privately or by a public auction, depending on the profit margin.

What steps should I take next?

Negotiate terms with your lender. If you default, you can try renegotiating the terms of your loan contract with your lender. While lenders may not always be willing to renegotiate, if you are successful you can minimize the damage to your business's financial health. Ways to reduce the negative impacts of the loan default include:

 Changing the terms of payment, e.g., paying less per installment but for a longer period of time
• Paying less over more time with a higher interest rate
• Asking your lender to forgive a portion of your late payment and agree to pay on time in the future

Consider government debt relief options. The federal government’s Small Business Administration (SBA) can help facilitate business loans with a third party lender, guarantee a bond, or help a business find venture capital. During severe financial crises, the government often creates specific programs for a limited time to help faltering small businesses.

Cut costs. Minimize your expenses. Though this may not be an ideal situation, you can consider laying off part of your staff and downsizing your business, among others. If you are paying rent for your place of business, consider moving to smaller quarters or to a locale where rents are less expensive, if doing so won’t harm your business’ sales or  a move won’t be too costly.

Sell business assets. Liquidating business assets or converting your assets into cash may temporarily help you pay off your loans until you can afford to pay your bills on time again.

Consult a lawyer. Consulting a lawyer about your options may also help you through the process. 

What does this mean for the future of my business?

Difficulty finding new loans. After you default on one loan, it will make it much more difficult to find a new loan. If loans are the chief means of financing your business, then you will be running into some difficult hurdles. You may want to start looking into other methods of funding your business.

Bankruptcy. If your business cannot repay its loans, you may need to file for bankruptcy.
 
What Can I Do to Avoid a Loan Default?

Of course, the best way to avoid defaulting is to pinpoint the pitfalls of bad loans and avoid them at all costs. To avoid loan defaults, business owners should remember the following best practices:

• Have a concrete payment plan before you decide to borrow.
• Do not offer collateral and property in your contract that you cannot afford to lose.
• Read the fine print and thoroughly understand the terms of the contract.

Understanding Your Credit Rating

The FICO® score, developed by Fair Isaac Corporation (the pioneer in credit scoring), is a number between 300 and 850 that lenders use to determine your credit rating. A FICO® score is a snapshot of your credit rating at a particular point in time. The higher your credit score, the more likely you are to be approved for loans and receive favorable rates.

More than 70% of the 100 largest financial institutions use FICO® scores to make billions of credit decisions each year, including more than 75 percent of mortgage loan originations. 

What does the score mean? Generally, the scores equate to the following (keep in mind each lender will have their own criteria that may differ somewhat from the values shown):

  • 500-619 is considered a sub-prime score
  • 620-699 is considered a medium score
  • 700 and above is considered a good to excellent score

How are they determined? The five areas considered in the calculation of your credit score listed from most important to least important are:

  • Payment history 
  • Amount owed 
  • Length of credit history 
  • New credit 
  • Types of credit in use 

How can your score be improved? Generally, people with high scores consistently:

  • Pay bills on time 
  • Keep balances low on credit cards and other revolving credit products 
  • Apply for and open new credit accounts only as needed 

Want to check your score? 

How Is Your Credit Rating Doing?

Whether you are certain that your credit rating is strong, or have had credit problems in the past and want to double check that your credit rating has improved, it's a good idea to review your credit report every few years and check it for accuracy. Below are the names of the three major sources of credit information. It's important to check your credit before making a major purchase like a car or a home, so that when you need to sail through the loan process with your good credit, you'll avoid any surprises. Generally, if you order a credit report via the Web, you'll pay a minimal fee and get the results within a day or two. 

Many of the credit rating companies offer special programs for periodic credit reports, fraud and ID theft protection. For additional information about the specific program available from the credit rating companies, refer to their individual websites (see list below). The three major companies used by most lenders or creditors checking on your credit are: 

Avoid Becoming a Victim of Identity Theft

Minimize the INFORMATION a thief can steal - The following are some guidelines to help avoid becoming a victim of identity fraud. If you have already become a victim, see our Tips for Victims.

• Beware of Fake IRS E-Mails.
 the IRS does not initiate communication with taxpayers through e-mail.

• Don't carry a Social Security Card
, extra credit cards or a passport unless the documents are needed.

• Memorize your Social Security Number
, any personal identification numbers and passwords. If you write them down, do not record them on anything in your wallet or purse. When creating a password or PIN, do not use digits from your Social Security number, telephone number or date of birth.

• Sign new credit cards upon receipt.
Save all credit card receipts and match them against your monthly bills. Never throw them away intact in a public trash container.

• Never loan out your credit card.
Report lost or stolen credit cards immediately.

Never give out personal identity information, especially Social Security or credit card numbers over the phone, unless you know the person or business and you initiated the phone call.

• Beware of phone or mail solicitations
disguised as promotions offering prizes or bargains designed solely to obtain your Social Security or credit card numbers.

• Don't leave mail out for pickup
and do have a locked mailbox. Promptly remove mail from your mailbox after delivery.

• Shred all mail, bills, receipts and financial documents
with your name or identification numbers on them, especially pre-approved offers of credit. Thieves have been known to fish identities out of trash bins.

• Look over monthly credit card and bank statements carefully.
Follow up if any charges or withdrawals appear suspicious.

• Order credit reports from the three major credit bureaus at least once a year
and more often if you have been a victim. Check every line of information in your file for fraudulent activity and other discrepancies.

• Pay bills electronically when possible.
Follow up with creditors if you do not receive a bill on time because it could mean an identity thief has taken over your account and has changed the billing address.

• Remove your name from the marketing lists
of the three major credit reporting bureaus to limit the pre-approved offers of credit you receive.

• Keep the number of credit cards you use to a bare minimum.
Cancel all unused credit card accounts.


Tips for Victims of Identity Theft

The following are recommended actions for victims of identity theft:
    • Contact the fraud departments of the three major credit bureaus. Ask to have your credit file flagged with a fraud alert that includes a statement asking creditors to call you before opening new accounts in your name.
    • Contact all creditors by phone and in writing to inform them of the problem. 
    • Call your local police and the nearest U.S. Postal Inspection Service to report the crime. 
    • Keep a log of all your contacts with creditors and authorities and make copies of all documents.
    • Contact the state office of the Department of Motor Vehicles to learn whether another driver's license was issued in your name. 
    • Contact the IRS Identity Protection Specialized Unit at 800-908-4490 right away so steps can be taken to secure your tax account and match your SS, and fill out the IRS Identity Theft Affidavit, Form 14039, available on the IRS web site at www.irs.gov. If your state has an income tax, also advise your state tax agency that your identity has been stolen.

    • Report incidents of identity theft to the Federal Trade Commission at www.consumer.ftc.gov or the FTC Identity Theft hotline at 877-438-4338 or TTY 866-653-4261.

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