Consolidating your debt is only half of the battle. You still need a plan to get your debt paid in full. This calculator can show you how to accelerate your debt payoff.

The process is simple; just apply a portion of your consolidated loan's monthly payment savings to the consolidated loan's balance. You can save hundreds, even thousands in interest and shave years off of your loan!

Debt should be incurred with caution. Yet there are ways to take advantage of your available credit to enjoy a purchase, make an investment, or take care of an emergency. Here is a guide to finding out which form of borrowing will best suit your needs and some pointers on finding the lowest-cost loan available.

 

Types Of Loans

Let’s take a look at the various ways you can borrow money—and the negative and positive aspects of each.

Home Equity Loans

By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please at an interest rate that is relatively low. Furthermore, under the tax law—depending on your specific situation—you may be allowed to deduct the interest because the debt is secured by your home.

Home Equity Lines Of Credit

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills—not for day-to-day expenses. With a home equity line, you will be approved for a specific amount of credit— your credit limit—that is the maximum amount you can borrow at any one time while you have the plan.

Many lenders set the credit limit on a home equity line by taking a percentage (say, 75%) of the appraised value of the home and subtracting the balance owed on the existing mortgage.

Example: A home with a $60,000 mortgage debt is appraised at $200,000. The bank sets a 75% credit limit. Thus, the potential credit line is $90,000 (75% of $200,000 = $150,000 - $60,000).

In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, other financial obligations, and your credit history.

Home equity plans often set a fixed time during which you can borrow money, such as 10 years. When this period is up, the loan may allow you to renew the credit line. But, in a loan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance, while others may permit you to repay over a fixed time.

Once approved for the home equity plan, you will usually be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks. Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line—for example, $300—and to keep a minimum amount outstanding.

Some lenders also may require that you take an initial advance when you first set up the line.

Traditional Second Mortgage Loans

If you are thinking about a home equity line of credit you might also want to consider a more traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time.

Tip: Consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at the APR and other charges.

Caution: Do not simply compare the APR for a traditional mortgage loan with the APR for a home equity line—the APRs are figured differently. The APR for a traditional mortgage takes into account the interest rate charged plus points and other finance charges. The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

Automobile Loans

Automobile loans are among the most common types of loans today. Your automobile serves as the security for the loan. These loans are available not only through banks but also through automobile dealers. However, the dealer itself does not provide the financing; it simply routes the loan to an affiliated finance company, such as the General Motors Acceptance Corporation (GMAC).

Investment Loans

Borrowing against your securities can be a low-cost way to borrow money. No deduction is allowed for the interest unless the loan is used for investment or business purposes.

Caution: If your margin debt exceeds 50% of the value of your securities, you will be subject to a margin call, which means that you will have to come up with cash or sell securities. If the market is falling at the time, a margin call can cause a financial disaster. Therefore, we recommend against use of margin debt, unless the amount is kept way below 50%. We think 25% is a safe percentage.

CD And Passbook Loans

Because the rate of interest you are earning on the CD or savings account is probably less than the interest that would be charged on the loan, it is usually a better idea to withdraw the money in the account (waiting until the term of the CD is up, to avoid penalties), than to borrow against it.

Loans Against 401(K) Plans And Life Insurance

One advantage of borrowing from a 401(k) plan or profit-sharing plan, assuming loans are permitted, is that the interest you pay goes back into your own pocket—right into your 401(k) or profit-sharing account. The amount of the loan is limited.

Loans against life insurance policies used to be available at fairly low rates. If you can get a rate of 5 or 6% on a loan against the cash value of your life insurance policy, it is generally a good deal. If the rate is any higher than this, such a loan is generally not a good idea.

Credit Union Loans

Credit union loans may be available at lower rates than those of banks.

Banks And Savings And Loans

If you obtain an unsecured loan at a bank, the rate will be higher because there is no collateral. For this reason, unsecured bank loans are generally not attractive.

Credit Card Advances

These are almost always a bad idea, despite their convenience, because of the high rate you will pay.

How To Shop For A Loan

If you are thinking of borrowing, your first step is to figure out how much it will cost you and whether you can afford it. Then shop for the credit terms that best meet your borrowing needs without posing undue financial risk. Look carefully at the credit agreement and examine the terms and conditions of the various possibilities, including the annual percentage rate (APR) and the costs you will pay to establish the plan.

The Truth in Lending Act requires lenders to disclose the important terms and costs of credit, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. In general, neither the lender nor anyone else may charge a fee until after you have received this information. Use these disclosures to compare the costs of loans. You usually get these disclosures when you receive an application form and you will get additional disclosures before the loan is made. If any term has changed before the loan is made (other than a variable-rate feature), the lender must usually return all fees if you decide not enter into the loan because of the changed term.

Interest Rate Charges And Loan Features

Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you, in writing and before you sign any agreement, the finance charge and the annual percentage rate.

• The finance charge is the total dollar amount you pay to use credit. It includes interest costs, service charges and some credit-related insurance premiums. For example, a $10,000 loan may have a 10% interest rate and a service charge of $100; thus, the finance charge would total $1,100.
• The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it:

Example: You borrow $10,000 for one year at 10%. If you can keep the entire $10,000 for the whole year, and then pay back 11,000 at the end of the year, the APR is 10%. On the other hand, if you repay the $10,000, and the interest (a total of $11,000) in 12 equal monthly installments, you don't really get to use $10,000 for the whole year. In fact, you get to use less and less of that $10,000 each month. In this case, the $1,000 charge for credit amounts to an APR of 18%.

All creditors—banks, stores, car dealers, credit card companies, finance companies—must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure so that you can compare credit costs. The law says these two pieces of information must be shown to you before you sign a credit contract or use a credit card.

Interest rates may be either fixed or variable. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate). Lenders then add a margin, i.e., a number of percentage points, to the index value to arrive at the interest rate you will pay. This interest rate will change, mirroring fluctuations in the index.

Tip: Because the cost of borrowing is tied directly to the index rate, ask what index and margin each lender uses, how often the index changes, and how high it has risen in the past.

Sometimes lenders advertise a temporarily discounted rate — a rate that is unusually low and often lasts only for an introductory period, such as six months.

Variable rate plans may have a ceiling (or cap) on how high your interest rate can climb over the life of the loan. Some variable-rate plans limit how much your payment may increase and how low your interest rate may fall if interest rates drop. Some lenders may permit you to convert a variable rate to a fixed interest rate during the life of the plan or to convert all or a portion of your line to a fixed-term installment loan.

With a variable rate, your monthly payments may change. Assume, for example, that you borrow $10,000 under a loan that calls for interest-only payments. At a 10% interest rate, your initial payments would be $83 monthly. If the rate should rise over time to 15%, your payments will increase to $125 per month. Even with payments that cover interest plus some portion of the principal, there could be a similar increase in your monthly payment, unless the agreement calls for keeping payments level throughout the plan.

Agreements generally will permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to get additional funds during any period the interest rate reaches the cap.

Repaying The Loan

Consider how you will pay back any money you might borrow. Some plans set minimum payments that cover a portion of the principal of the amount you borrow plus accrued interest. But, unlike the typical installment loan, the portion that goes toward principal may not be enough to repay the debt by the end of the term. Other plans may allow payments of interest alone during the life of the plan, which means that you pay nothing toward the principal. Thus, if you borrow $10,000, you will owe that entire sum when the loan ends.

Regardless of the minimum payment required, you can usually pay more than the minimum. Many lenders may give you a choice of payment options.

Whatever your payment arrangements during the life of the loan—whether you pay some, a little, or none of the principal amount of the loan—you may have to pay the entire balance owed when the loan ends, all at once. You must be prepared to make this "balloon" payment by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose any security given for the loan (e.g., your home or car).

Comparing Loans

Even when you understand the terms a creditor is offering, it is easy to underestimate the difference in dollars that different terms can make. Suppose you are going to borrow $6,000. Compare the three credit arrangements below:

Creditor	APR	Length of Loan	Monthly Payment	Total Finance Charges	Total of Payments
Creditor A	14%	3 years	$205.07	$1,382.52	$7,382.52
Creditor B	14%	4 years	$163.96	$1,870.08	$7,870.08
Creditor C	15%	4 years	$166.98	$2,015	$8,015.04

How do these choices stack up? The answer depends partly on what you need.

• The lowest cost loan (total payments) is available from Lender A.
• If you were looking for the lowest monthly payments, that would be available from Lender B. This is because you are paying the loan off over a longer period of time. However, you would have to pay more in total costs. The loan from Lender B—also at a 14% APR but for four years—will add about $488 to your finance charge.
• If that four-year loan were available only from Lender C, the APR of 15% would add another $145 or so to your finance charges as compared with Lender B.

Other terms, such as the size of the down payment, will also make a difference. Be sure to look at all the terms before you make your choice.

Home Equity Loans

Before signing for a home equity line of credit or other type of home equity loan, weigh carefully the costs of a home equity debt against the benefits. Remember, failure to repay the line could mean the loss of your home.

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home, such as:

• A fee for a property appraisal, which estimates the value of your home;
• An application fee, which may not be refundable if you are turned down for credit;
• Up-front charges, such as one or more points (one point equals one percent of the credit limit);
• Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes; and
• Yearly membership or maintenance fees.

You also may be charged a transaction fee every time you draw on the credit line.

You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed. On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs.

Source: CPA Site Solutions

If you've ever applied for a credit card, a personal loan, or insurance, there's a file about you. This file is known as your credit report. It is chock full of information on where you live, how you pay your bills, and whether you've been sued, arrested, or filed for bankruptcy. Consumer reporting companies sell the information in your report to creditors, insurers, employers, and other businesses with a legitimate need for it. They use the information to evaluate your applications for credit, insurance, employment, or a lease.

Having a good credit report means it will be easier for you to get loans and lower interest rates. Lower interest rates usually translate into smaller monthly payments.

Nevertheless, newspapers, radio, TV, and the Internet are filled with ads for companies and services that promise to erase accurate negative information in your credit report in exchange for a fee. The scam artists who run these ads not only don't deliver — they can't deliver. Only time, a deliberate effort, and a plan to repay your bills will improve your credit as it's detailed in your credit report.

The Federal Trade Commission (FTC), the nation's consumer protection agency, has written this booklet to help explain how to build a better credit report. It has six sections:

Section 1: Explains your rights under the Fair Credit Reporting Act and the Fair and Accurate Credit Transactions Act.

Section 2: Tells how you can legally improve your credit report.

Section 3: Offers tips on dealing with debt.

Section 4: Cautions about credit-related scams and how to avoid them.

Section 5: Offers information about identity theft.

Section 6: Lists resources for additional information.

The Fair Credit Reporting Act

www.annualcreditreport.com (or any of the three nationwide consumer reporting companies), it's probably a scam. Don't reply or click on any link in the message. Instead, forward any email that claims to be from www.annualcreditreport.com (or any of the three consumer reporting companies) to spam@uce.gov, the FTC's database of deceptive spam.

Q: Are there other situations where I might be eligible for a free report?
A: Under federal law, you're entitled to a free report if a company takes adverse action against you, such as denying your application for credit, insurance, or employment, and you ask for your report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the consumer reporting company. You're also entitled to one free report a year if you're unemployed and plan to look for a job within 60 days; if you're on welfare; or if your report is inaccurate because of fraud, including identity theft. Otherwise, any of the three consumer reporting companies may charge you up to $9.50 for another copy of your report within a 12-month period.

To buy a copy of your report, contact:

Equifax 800-685-1111 www.equifax.com

Experian 888-EXPERIAN (397-3742) www.experian.com

Trans Union 800-916-8800 www.transunion.com

Under state law, consumers in Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, and Vermont already have free access to their credit reports.

For more information, see Your Access to Free Credit Reports at ftc.gov/credit.

Credit Scores

Q. What is a credit score, and how does it affect my ability to get credit?
A: Credit scoring is a system creditors use to help determine whether to give you credit, and how much to charge you for it.

Information about you and your credit experiences, like your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical formula, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor. A total number of points — a credit score — helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments on time. Generally, consumers with good credit risks have higher credit scores.

You can get your credit score from the three nationwide consumer reporting companies, but you will have to pay a fee for it. Many other companies also offer credit scores for sale alone or as part of a package of products.

For more information, see Credit Scoring at ftc.gov/credit.

Improving Your Credit Report

Your letter should clearly identify each item in your report that you dispute, state the facts and explain why you dispute the information, and request that the information be deleted or corrected. You may want to enclose a copy of your report with the items in question circled. Send your letter by certified mail, return receipt requested, so you can document what the consumer reporting company received. Keep copies of your dispute letter and enclosures.

Consumer reporting companies must investigate the items in question — usually within 30 days — unless they consider your dispute frivolous. They also must forward all the relevant data you provide about the inaccuracy to the organization that provided the information. After the information provider receives notice of a dispute from the consumer reporting company, it must investigate, review the relevant information, and report the results back to the consumer reporting company. If the information provider finds the disputed information is inaccurate, it must notify all three nationwide consumer reporting companies so they can correct the information in your file.

When the investigation is complete, the consumer reporting company must give you the written results and a free copy of your report if the dispute results in a change. (This free report does not count as your annual free report under the FACT Act.) If an item is changed or deleted, the consumer reporting company cannot put the disputed information back in your file unless the information provider verifies that the information is, indeed, accurate and complete. The consumer reporting company also must send you written notice that includes the name, address, and phone number of the information provider.

If you request, the consumer reporting company must send notices of any correction to anyone who received your report in the past six months. A corrected copy of your report can be sent to anyone who received a copy during the past two years for employment purposes.

If an investigation doesn't resolve your dispute with the consumer reporting company, you can ask that a statement of the dispute be included in your file and in future reports. You also can ask the consumer reporting company to provide your statement to anyone who received a copy of your report in the recent past. Expect to pay a fee for this service.

2. Tell the creditor or other information provider, in writing, that you dispute an item. Be sure to include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider reports the item to a consumer reporting company, it must include a notice of your dispute. And if you are correct - that is, if the information is found to be inaccurate - the information provider may not report it again.

Sample Dispute Letter

Date Your Name Your Address Your City, State, Zip Code Complaint Department Name of Company Address City, State, Zip Code Dear Sir or Madam: I am writing to dispute the following information in my file. The items I dispute also are encircled on the attached copy of the report I received. This item (identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.) is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be deleted (or request another specific change) to correct the information. Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please investigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible. Sincerely, Your name Enclosures: (List what you are enclosing)

 

Accurate Negative Information

When negative information in your report is accurate, only the passage of time can assure its removal. A consumer reporting company can report most accurate negative information for seven years and bankruptcy information for 10 years. Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. There is no time limit on reporting information about criminal convictions; information reported in response to your application for a job that pays more than $75,000 a year; and information reported because you've applied for more than $150,000 worth of credit or life insurance. There is a standard method for calculating the seven-year reporting period. Generally, the period runs from the date that the event took place.

Adding Accounts to Your File

Your credit file may not reflect all your credit accounts. Most national department store and all-purpose bank credit card accounts are included in your file, but not all. Some travel, entertainment, gasoline card companies, local retailers, and credit unions are among those that usually aren't included.

If you've been told that you were denied credit because of an "insufficient credit file" or "no credit file" and you have accounts with creditors that don't appear in your credit file, ask the consumer reporting companies to add this information to future reports. Although they are not required to do so, many consumer reporting companies will add verifiable accounts for a fee. However, if these creditors do not generally report to the consumer reporting company, the added items will not be updated in your file.

Dealing with Debt

• ftc.gov/credit.

Avoiding Scams

1. www.ftc.gov/bcp/edu/microsites/idtheft/. If you don't have Internet access, call the FTC's Identity Theft Hotline, toll-free: 1-877-IDTHEFT (438-4338); TTY: 1-866-653-4261; or write: Identity Theft Clearinghouse, Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580.

For more information, see ID Theft: What's It All About or Take Charge: Fighting Back Against Identity Theft at www.ftc.gov/bcp/edu/microsites/idtheft/.

For More Information

Equal Credit Opportunity Act/span> prohibits the denial of credit because of your sex, race, marital status, religion, national origin, age, or because you receive public assistance.

The Fair Credit Reporting Act gives you the right to learn what information is being distributed about you by credit reporting companies.

The Truth in Lending Act requires lenders to give you written disclosures of the cost of credit and terms of repayment before you enter into a credit transaction.

The Fair Credit Billing Act establishes procedures for resolving billing errors on your credit card accounts.

The Fair Debt Collection Practices Act prohibits debt collectors from using unfair or deceptive practices to collect overdue bills that your creditor has forwarded for collection.

The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

Federal Trade Commission
Bureau of Consumer Protection
Office of Consumer and Business Education
May 2005

The Federal Trade Commission enforces a number of credit laws and has free information about them:

Turning to a business that offers help in solving debt problems may seem like a reasonable solution when your bills become unmanageable. Be cautious. Before you do business with any company, check it out with your local consumer protection agency or the Better Business Bureau in the company's location.

Ads Promising Debt Relief May Really Be Offering Bankruptcy

Consumer debt is at an all-time high. What's more, a record number of consumers — more than 1.6 million in 2003 — are filing for bankruptcy. Whether your debt dilemma is the result of an illness, unemployment, or overspending, it can seem overwhelming. In your effort to get solvent, be on the alert for advertisements that offer seemingly quick fixes. And read between the lines when faced with ads in newspapers, magazines, or even telephone directories that say:

"Consolidate your bills into one monthly payment without borrowing" "STOP credit harassment, foreclosures, repossessions, tax levies and garnishments" "Keep Your Property" "Wipe out your debts! Consolidate your bills! How? By using the protection and assistance provided by federal law. For once, let the law work for you!"

 

While the ads pitch the promise of debt relief, they rarely say relief may be spelled b-a-n-k-r-u-p-t-c-y. And although bankruptcy is one option to deal with financial problems, it's generally considered the option of last resort. The reason: it has a long-term negative impact on your creditworthiness. A bankruptcy stays on your credit report for 10 years, and can hinder your ability to get credit, a job, insurance, or even a place to live. What's more, it can cost you attorneys' fees.

Advance-Fee Loan Scams

These scams often target consumers with bad credit problems or those with no credit. In exchange for an up-front fee, these companies "guarantee" that applicants will get the credit they want — usually a credit card or a personal loan.

The up-front fee may be as high as several hundred dollars. Resist the temptation to follow up on advance-fee loan guarantees. They may be illegal. Many legitimate creditors offer extensions of credit, such as credit cards, loans, and mortgages through telemarketing, and require an application fee or appraisal fee in advance. But legitimate creditors never guarantee in advance that you'll get the loan. Under the federal Telemarketing Sales Rule, a seller or telemarketer who guarantees or represents a high likelihood of your getting a loan or some other extension of credit may not ask for or receive payment until you've received the loan.

Recognizing an Advance-Fee Loan Scam
Ads for advance-fee loans often appear in the classified ad section of local and national newspapers and magazines. They also may appear in mailings, radio spots, and on local cable stations. Often, these ads feature "900" numbers, which result in charges on your phone bill. In addition, these companies often use delivery systems other than the U.S. Postal Service, such as overnight or courier services, to avoid detection and prosecution by postal authorities.

It's not hard to confuse a legitimate credit offer with an advance-fee loan scam. An offer for credit from a bank, savings and loan, or mortgage broker generally requires your verbal or written acceptance of the loan or credit offer. The offer usually is subject to a check of your credit report after you apply to make sure you meet their credit standards. Usually, you are not required to pay a fee to get the credit.

Hang up on anyone who calls you on the phone and says they can guarantee you will get a loan if you pay in advance. It's against the law.

Protecting Yourself
Here are some tips to keep in mind before you respond to ads that promise easy credit, regardless of your credit history:

• Most legitimate lenders will not "guarantee" that you will get a loan or a credit card before you apply, especially if you have bad credit, or a bankruptcy.
• It is an accepted and common practice for reputable lenders to require payment for a credit report or appraisal. You also may have to pay a processing or application fee.
• Never give your credit card account number, bank account information, or Social Security number out over the telephone unless you are familiar with the company and know why the information is necessary.

Credit Repair Scams

You see the ads in newspapers, on TV, and on the Internet. You hear them on the radio. You get fliers in the mail. You may even get calls from telemarketers offering credit repair services. They all make the same claims:

"Credit problems? No problem!" "We can erase your bad credit-100% guaranteed." "Create a new credit identity-legally." "We can remove bankruptcies, judgments, liens, and bad loans from your credit file forever!"

 

Do yourself a favor and save some money, too. Don't believe these statements. They're just not true. Only time, a conscientious effort, and a plan for repaying your debt will improve your credit report.

The Warning Signs
If you should decide to respond to an offer to repair your credit, think twice. Don't do business with any company that:

• wants you to pay for credit repair services before any services are provided
• does not tell you your legal rights and what you can do yourself — for free
• recommends that you not contact a consumer reporting company directly
• suggests that you try to invent a "new" credit report by applying for an Employer Identification Number to use instead of your Social Security number
• advises you to dispute all information in your credit report or take any action that seems illegal, such as creating a new credit identity. If you follow illegal advice and commit fraud, you may be subject to prosecution.

You could be charged and prosecuted for mail or wire fraud if you use the mail or telephone to apply for credit and provide false information. It's a federal crime to make false statements on a loan or credit application, to misrepresent your Social Security number, and to obtain an Employer Identification Number from the Internal Revenue Service under false pretenses.

The Credit Repair Organizations Act
By law, credit repair organizations must give you a copy of the "Consumer Credit File Rights Under State and Federal Law" before you sign a contract. They also must give you a written contract that spells out your rights and obligations. Read these documents before signing the contract. The law contains specific consumer protections. For example, a credit repair company cannot:

• make false claims about their services
• charge you until they have completed the promised services
• perform any services until they have your signature on a written contract and have completed a three-day waiting period. During this time, you can cancel the contract without paying any fees.

Your contract must specify:

• the total cost of the services
• a detailed description of the services to be performed
• how long it will take to achieve the results
• any "guarantees" they offer
• the company's name and business address.

Where to Complain
If you've had a problem with any of the scams described here, contact your local consumer protection agency, state Attorney General (AG), or Better Business Bureau. Many AGs have toll-free consumer hotlines. Check with your local directory assistance.

Identity Theft

An identity thief is someone who obtains some piece of your sensitive information, like your Social Security number, date of birth, address, and phone number, and uses it without your knowledge to commit fraud or theft.

How Identity Thieves Get Your Information
Skilled identity thieves use a variety of methods to gain access to your personal information. For example, they may:

• get information from businesses or other institutions by:
  • stealing records or information while they're on the job
  • bribing an employee who has access to these records
  • hacking these records
  • conning information out of employees
• rummage through your trash, the trash of businesses, or public trash dumps in a practice known as "dumpster diving"
• get your credit reports by abusing their employer's authorized access to them, or by posing as a landlord, employer, or someone else who may have a legal right to access your report
• steal your credit or debit card numbers by capturing the information in a data storage device in a practice known as "skimming". They may swipe your card for an actual purchase, or attach the device to an ATM machine where you may enter or swipe your card.
• steal wallets and purses containing identification and credit and bank cards.
• steal mail, including bank and credit card statements, new checks, or tax information
• complete a "change of address form" to divert your mail to another location
• steal personal information from your home
• scam information from you by posing as a legitimate business person or government official

How Identity Thieves Use Your Information
Once identity thieves have your personal information, they may:

• go on spending sprees using your credit and debit card account numbers to buy "big-ticket" items like computers that they can easily sell
• open a new credit card account, using your name, date of birth, and Social Security number. When they don't pay the bills, the delinquent account is reported on your credit report.
• change the mailing address on your credit card account. The imposter then runs up charges on the account. Because the bills are being sent to the new address, it may take some time before you realize there's a problem.
• take out auto loans in your name
• establish phone or wireless service in your name
• counterfeit checks or debit cards, and drain your bank account
• open a bank account in your name and write bad checks on that account
• file for bankruptcy under your name to avoid paying debts they've incurred, or to avoid eviction
• give your name to the police during an arrest. If they are released and don't show up for their court date, an arrest warrant could be issued in your name.

Protecting Yourself
Managing your personal information is key to minimizing your risk of becoming a victim of identity theft.

• Keep an eye on your purse or wallet, and keep them in a safe place at all times.
• Don't carry your Social Security card.
• Don't share your personal information with random people you don't know. Identity thieves are really good liars, and could pretend to be from banks, Internet service providers, or even government agencies to get you to reveal identifying information.
• Read the statements from your bank and credit accounts and look for unusual charges or suspicious activity. Report any problems to your bank and creditors right away.
• Tear up or shred your charge receipts, checks and bank statements, expired charge cards, and any other documents with personal information before you put them in the trash.

How To Tell If You're a Victim of Identity Theft
Monitor the balances of your financial accounts. Look for unexplained charges or withdrawals. Other indications of identity theft can be:

• failing to receive bills or other mail signaling an address change by the identity thief;
• receiving credit cards for which you did not apply;
• denial of credit for no apparent reason; or
• receiving calls from debt collectors or companies about merchandise or services you didn't buy.

What To Do If Your Identity's Been Stolen
If you suspect that your personal information has been used to commit fraud or theft, take the following four steps right away. Follow up all calls in writing; send your letter by certified mail, and request a return receipt, so you can document what the company received and when; and keep copies for your files.

1. Place a fraud alert on your credit reports and review your credit reports.
   Contact any one of the nationwide consumer reporting companies to place a fraud alert on your credit report. Fraud alerts can help prevent an identity thief from opening any more accounts in your name. The company you call is required to contact the other two, which will place an alert on their versions of your report, too.

   Equifax: 1-800-525-6285;

   In addition to placing the fraud alert on your file, the three consumer reporting companies will send you free copies of your credit reports, and, if you ask, they will display only the last four digits of your Social Security number on your credit reports.

2. Close the accounts that you know, or believe, have been tampered with or opened fraudulently.
   Contact the security or fraud department of each company where you know, or believe, accounts have been tampered with or opened fraudulently. Follow up in writing, and include copies (NOT originals) of supporting documents. It's important to notify credit card companies and banks in writing. Send your letters by certified mail, return receipt requested, so you can document what the company received and when. Keep a file of your correspondence and enclosures.

   When you open new accounts, use new Personal Identification Numbers (PINs) and passwords. Avoid using easily available information like your mother's maiden name, your birth date, the last four digits of your Social Security number or your phone number, or a series of consecutive numbers.

3. File a report with your local police or the police in the community where the identity theft took place.
   Get a copy of the police report or, at the very least, the number of the report. It can help you deal with creditors who need proof of the crime. If the police are reluctant to take your report, ask to file a "Miscellaneous Incidents" report, or try another jurisdiction, like your state police. You also can check with your state Attorney General's office to find out if state law requires the police to take reports for identity theft. Check the Blue Pages of your telephone directory for the phone number or check www.naag.org for a list of state Attorneys General.

4. File a complaint with the Federal Trade Commission.
   By sharing your identity theft complaint with the FTC, you will provide important information that can help law enforcement officials across the nation track down identity thieves and stop them. The FTC also can refer your complaint to other government agencies and companies for further action, as well as investigate companies for violations of laws that the FTC enforces.

   You can file a complaint online at

Equifax: www.equifax.com
Experian: 1-888-EXPERIAN (397-3742); www.experian.com
TransUnion: 1-800-680-7289; www.transunion.com

Having trouble paying your bills? Getting dunning notices from creditors? Are your accounts being turned over to debt collectors? Are you worried about losing your home or your car?

You're not alone. Many people face financial crises at some time in their lives. Whether the crisis is caused by personal or family illness, the loss of a job, or simple overspending, it can seem overwhelming. But often, it can be overcome. The fact is that your financial situation doesn't have to go from bad to worse.

If you or someone you know is in financial hot water, consider these options: realistic budgeting, credit counseling from a reputable organization, debt consolidation, or bankruptcy. How do you know which will work best for you? It depends on your level of debt, your level of discipline, and your prospects for the future.

Self-Help

Developing a Budget
The first step toward taking control of your financial situation is to do a realistic assessment of how much money you take in and how much money you spend. Start by listing your income from all sources. Then, list your "fixed" expenses — those that are the same each month — like mortgage payments or rent, car payments, and insurance premiums. Next, list the expenses that vary — like entertainment, recreation, and clothing. Writing down all your expenses, even those that seem insignificant, is a helpful way to track your spending patterns, identify necessary expenses, and prioritize the rest. The goal is to make sure you can make ends meet on the basics: housing, food, health care, insurance, and education.

Your public library and bookstores have information about budgeting and money management techniques. In addition, computer software programs can be useful tools for developing and maintaining a budget, balancing your checkbook, and creating plans to save money and pay down your debt.

Contacting Your Creditors
Contact your creditors immediately if you're having trouble making ends meet. Tell them why it's difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level. Don't wait until your accounts have been turned over to a debt collector. At that point, your creditors have given up on you.

Dealing with Debt Collectors
The Fair Debt Collection Practices Act is the federal law that dictates how and when a debt collector may contact you. A debt collector may not call you before 8 a.m., after 9 p.m., or while you're at work if the collector knows that your employer doesn't approve of the calls. Collectors may not harass you, lie, or use unfair practices when they try to collect a debt. And they must honor a written request from you to stop further contact.

Credit Counseling
If you're not disciplined enough to create a workable budget and stick to it, can't work out a repayment plan with your creditors, or can't keep track of mounting bills, consider contacting a credit counseling organization. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. But be aware that just because an organization says it's "nonprofit", there's no guarantee that its services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden, or pressure consumers to make large "voluntary" contributions that can cause more debt.

Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Auto and Home Loans
Your debts can be secured or unsecured. Secured debts usually are tied to an asset, like your car for a car loan, or your house for a mortgage. If you stop making payments, lenders can repossess your car or foreclose on your house. Unsecured debts are not tied to any asset, and include most credit card debt, bills for medical care, signature loans, and debts for other types of services.

Most automobile financing agreements allow a creditor to repossess your car any time you're in default. No notice is required. If your car is repossessed, you may have to pay the balance due on the loan, as well as towing and storage costs, to get it back. If you can't do this, the creditor may sell the car. If you see default approaching, you may be better off selling the car yourself and paying off the debt: You'll avoid the added costs of repossession and a negative entry on your credit report.

If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders are willing to work with you if they believe you're acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time. When you resume regular payments, though, you may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt. Ask whether additional fees would be assessed for these changes, and calculate how much they total in the long term.

If you and your lender cannot work out a plan, contact a housing counseling agency. Some agencies limit their counseling services to homeowners with FHA mortgages, but many offer free help to any homeowner who's having trouble making mortgage payments. Call the local office of the Department of Housing and Urban Development or the housing authority in your state, city, or county for help in finding a legitimate housing counseling agency near you.

Debt Consolidation

You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. Remember that these loans require you to put up your home as collateral. If you can't make the payments — or if your payments are late — you could lose your home.

What's more, the costs of consolidation loans can add up. In addition to interest on the loans, you may have to pay "points", with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.

Bankruptcy

Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Still, it is a legal procedure that offers a fresh start for people who can't satisfy their debts. People who follow the bankruptcy rules receive a discharge — a court order that says they don't have to repay certain debts.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. As of January 2005, the filing fees run about $185 for Chapter 13 and $200 for Chapter 7. Attorney fees are additional and can vary.

Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car, that they otherwise might lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off a default during a three-to-five-year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts.

Chapter 7 is known as straight bankruptcy, and involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official — a trustee — or turned over to your creditors. You can receive a discharge of your debts through Chapter 7 only once every six years.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts vary. Note that personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or lien on it.

For more information, see Knee Deep in Debt and Fiscal Fitness: Choosing a Credit Counselor.

Under the FCRA, both the consumer reporting company and the information provider (the person, company, or organization that provides information about you to a consumer reporting company) are responsible for correcting inaccurate or incomplete information in your report. To take advantage of all your rights under the FCRA, contact the consumer reporting company and the information provider if you see inaccurate or incomplete information.

1. Tell the consumer reporting company, in writing, what information you think is inaccurate. Include copies (NOT originals) of documents that support your position. In addition to providing your complete name and address

The Fair Credit Reporting Act (FCRA) promotes the accuracy, fairness, and privacy of information in the files of the nation's consumer reporting companies. The FTC enforces the FCRA with respect to consumer reporting companies. Recent amendments to the FCRA expand consumer rights and place additional requirements on consumer reporting companies. Businesses that provide information about consumers to consumer reporting companies and businesses that use credit reports also have new responsibilities under the law.

Here are some questions consumers have asked the FTC about consumer reports and consumer reporting companies, and the answers.

Q. Do I have a right to know what's in my report?
A. You have the right to know what's in your report, but you have to ask for the information. The consumer reporting company must tell you everything in your report, and give you a list of everyone who has requested your report within the past year - or the past two years if the requests were related to employment.

Q. What type of information do consumer reporting companies collect and sell?
A. Consumer reporting companies collect and sell four basic types of information:

• Identification and employment information: Your name, birth date, Social Security number, employer, and spouse's name are noted routinely. The consumer reporting company also may provide information about your employment history, home ownership, income, and previous address, if a creditor asks.
• Payment history: Your accounts with different creditors are listed, showing how much credit has been extended and whether you've paid on time. Related events, such as the referral of an overdue account to a collection agency, also may be noted.
• Inquiries: Consumer reporting companies must maintain a record of all creditors who have asked for your credit history within the past year, and a record of individuals or businesses that have asked for your credit history for employment purposes for the past two years.
• Events that are a matter of public record, such as bankruptcies, foreclosures, or tax liens, may appear in your report.

Q. Is there a charge for my report?
A. Under the Free File Disclosure Rule of the Fair and Accurate Credit Transactions Act (FACT Act), each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — is required to provide you with a free copy of your credit report once every 12 months, if you ask for it.

These consumer reporting companies are phasing in free reports geographically through September 1, 2005. After that, free reports will be accessible to all Americans, regardless of where they live.

• Free reports have been available to consumers in the Western states — Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming — since December 1, 2004.
• Consumers in the Midwestern states — Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin — have been able to order free reports since March 1, 2005.
• Consumers in the Southern states — Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Oklahoma, South Carolina, Tennessee, and Texas — can begin ordering their free reports June 1, 2005.
• Consumers in the Eastern states — Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Vermont, Virginia, and West Virginia — the District of Columbia, Puerto Rico, and all U.S. territories can begin ordering their free reports September 1, 2005.

Q: How do I order my free report?
A: The three nationwide consumer reporting companies are using one website, one toll-free telephone number, and one mailing address for consumers to order their free annual report. To order, click on www.annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Do not contact the three nationwide consumer reporting companies individually. You may order your free annual reports from each of the consumer reporting companies at the same time, or you can order from only one or two. The law allows you to order one free copy from each of the nationwide consumer reporting companies every 12 months.

Q: What information do I have to provide to get my free report?
A: You need to provide your name, address, Social Security number, and date of birth. If you have moved in the last two years, you may have to provide your previous address. To maintain the security of your file, each nationwide consumer reporting company may ask you for some information that only you would know, like the amount of your monthly mortgage payment. Each company may ask you for different information because the information each has in your file may come from different sources.

Still, www.annualcreditreport.com is the only authorized online source for your free annual credit report from the three nationwide consumer reporting companies. Neither the website nor the companies will call you first to ask for personal information or send you an email asking for personal information.

Monitor and review your credit report. You may request your free credit report online, by phone or through the mail.

Free credit reports requested online are viewable immediately upon authentication of identity. Free credit reports requested by phone or mail will be processed within 15 days of receiving your request.

Source: Central Source LLC

Like dandelions in a spring lawn, credit card offers pop up everywhere--stuffing your mailbox, flashing on the Internet, even falling from the magazines in your doctor's waiting room. And they all sound so attractive. "0% APR until next year!" "No fee if you transfer a balance now!" "Low fixed rate!"

You're thinking of applying for a card, but how do you decide which offer is best for you?

Source: Federal Reserve Board

Which are the best credit cards?

Finding the best credit card is mostly a matter of comparison shopping. Before you accept a credit card offer, be sure to understand the card's credit terms. For instance, what is the annual percentage rate? Is there a free period? How much is the annual fee? Then compare costs and features of other cards to see if you can get a better deal.

Tip: Which card is best for you may depend on how you plan to use it. If you plan to pay bills in full each month, the size of the annual fee or other fees, and not the periodic and annual percentage rate, may be more important. If you expect to use credit cards to pay for purchases over time, the APR and the balance computation method are important terms to consider. In either case, keep in mind that your costs will be affected by whether or not there is a grace period.

The "annual percentage rate," or APR, is a measure of the cost of credit, expressed as a yearly rate.

The card issuer also must disclose the "periodic rate" applied to your outstanding account balance to figure the finance charge for each billing period.

If the credit card you are considering has a "variable rate" feature, the card issuer must tell you that the rate may vary and how the rate is determined. You also must be told how much and how often your rate may change.

A free period—also called a "grace period"—allows you to avoid the finance charge by paying your current balance in full before the "due date" shown on your statement. Knowing whether a credit card plan gives you a free period is especially important if you plan to pay your account in full each month.

If there is no free period, the card issuer will impose a finance charge from the date you use your credit card or from the date each transaction is posted to your account.

Most credit card issuers charge annual membership or other participation fees. These fees range from $25 to $50 for most cards, and from $75 on up for premium cards.

A credit card also may involve other types of costs. For example, some card issuers charge a fee when you use the card to obtain a cash advance, when you fail to make a payment on time, or when you go over your credit limit. Some charge a flat monthly fee whether or not you use the card.

If someone steals my credit card, how much am I liable for?

Under federal law, if your credit card is used without your authorization, you can be held liable for up to $50 per card. If you report the loss before the card is used, federal law says the card issuer cannot hold you responsible for any unauthorized charges.

If a thief uses your card before you report it missing, the most you will owe for unauthorized charges is $50. This is true even if a thief is able to use your credit card at an automated teller machine (ATM) to access your credit card account.

To minimize your liability, report the loss of your card as soon as possible. Some companies have toll-free numbers printed on their statements and 24-hour service to accept such emergency information. For your own protection, you should follow up your phone call with a letter to the card issuer. The letter should give your card number, say when your card was missing, and mention the date you called in the loss.

Are rebate credit cards a good deal?

The use of rebates has grown rapidly. About one-quarter of the hundreds of millions of credit cards in use offer rebates. Credit card solicitations promise cash, frequent-flier miles or points that will buy everything from gas to video rentals.

Tip: You’ll get a good deal from a rebate card if you spend a lot, and if you pay your bill in full each month. If you carry a balance on the card, what you gain in rebates you will lose in the excessive interest charged by credit cards.

Here are some of the rebate cards offered, with their terms (at the time of this writing):

1. The Discover Card (800-347-2683). Offers up to 1% back on unlimited amounts once you've spent $3,000.
2. American Express Membership Rewards (800-297-3276). Awards a point for each dollar charged. Points can be used at CompUSA, NordicTrack, Saks Fifth Avenue, Timberland, and others. Once you have more than 999 points, you can transfer them to a frequent-flier program.
3. Citibank/Apple Computers Visa (800-374-9999). Gives 2.5% back on up to $3,000 of purchases a year and 5% on higher amounts. Rebates may be applied toward the purchase of Apple computers.
4. GE Rewards MasterCard (800-544-5232). Rebate maxes out at 2% on up to $10,000 of purchases a year. Because the rebate is figured on a graduated scale, the maximum on the $10,000 is actually 1.4% or $140 a year.
5. General Motors MasterCard (800-846-2273). Earns 5% toward the purchase of any GM automobile, excluding Saturn; under a special program, cardholders may earn up to 10%. Maximum rebate: $3,500 ($7,000 for Goldcard holders) over seven years.
6. Nordstrom Visa (800-935-4210). Up to a 5% discount on Nordstrom purchases once you charge $5,000 on the card.

The terms of these cards change often, so be sure to inquire about them before signing up.

What is the difference between the average daily balance, adjusted balance and previous balance?

Average Daily Balance (including or excluding new purchases). The average daily balance method gives you credit for your payment from the day the card issuer receives it. To compute the balance due, the card issuer totals the beginning balance for each day in the billing period and deducts any payments credited to your account that day. New purchases may or may not be added to the balance, depending on the plan, but cash advances typically are added. The resulting daily balances are added up for the billing cycle and the total is then divided by the number of days in the billing period to arrive at the "average daily balance." This is the most common method used by credit card issuers.

Adjusted Balance. This balance is computed by subtracting the payments you made and any credits you received during the present billing period from the balance you owed at the end of the previous billing period. New purchases that you made during the billing period are not included. Under the adjusted balance method, you have until the end of the billing cycle to pay part of your balance and you avoid the interest charges on that portion. Some creditors exclude prior, unpaid finance charges from the previous balance. The adjusted balance method usually is the most advantageous to card users.

Previous Balance. As the name suggests, this balance is simply the amount you owed at the end of the previous billing period. Payments, credits, or new purchases made during the current billing period are not taken into account. Some creditors also exclude unpaid finance charges in computing this balance.

What can I do if I am dissatisfied with a credit card purchase?

If you have a problem with merchandise or services that you charged to a credit card, and you have made a good faith effort to work out the problem with the seller, you have the right to withhold from the card issuer payment for the merchandise or services. Check with your credit card company regarding their policies.

If you do not achieve satisfaction through the seller or credit card company, you can file a small claims court action—an informal legal proceeding that can be used to settle disputes. Check your local telephone book under your municipal, county, or state government headings for small claims court listings.

In addition, you have the following rights:

You have the right to have mail and phone order purchases shipped when promised, or to cancel for a full and prompt refund. If no shipping date is stated, your right to cancel begins 30 days after your order and payment are received by the merchant. If you cancel, the seller has one billing cycle to tell the card issuer to credit your account.

There are two exceptions to the 30-day shipment rule: (1) If a company doesn't promise a shipping time, and you are applying for credit to pay for your purchase, the company has 50 days after receiving your order to ship. (2) Spaced deliveries, such as magazine subscriptions (except for first shipment); items that continue until you cancel (e.g. book or record clubs, etc.); C.O.D. (cash on delivery) orders; services; and seeds or growing plants are not covered.

You have the right to a full refund--because of shipping delay--within seven working days (or one billing cycle) after the seller receives your request to cancel.

You may refuse a delivery of damaged or spoiled items.

Tip: If there is obvious damage to a package you receive in the mail, and if you decide not to accept the package, write "REFUSED" on the wrapper (at time of delivery) and return it unopened to the seller. No new postage is needed, unless the package came by insured, registered, certified or C.O.D. mail and you signed for it.

Tip: If you are ordering something to be delivered by C.O.D., make your check out to the seller, not the post office. That way, you may contact your bank and stop the check if there is an immediate problem with merchandise.

When you return merchandise or pay more than you owe, you have the option of keeping the credit balance on your account or requesting a refund (if the amount exceeds $1.00). To obtain a refund, write the card issuer. The card issuer must send you the refund within seven business days of receiving your request.

What can I do if there is a mistake on my credit card bill?

Federal law provides specific rules that the card issuer must follow for promptly correcting billing errors. The card issuer will give you a statement describing these rules when you open the credit card account and, after that, at least once a year. In fact, many card issuers print a summary of your rights on each bill they send you.

You must notify the card issuer in writing at the address specified for billing errors when you find an error, and you must do so within 60 days after the first bill containing the error was mailed to you. (For this reason, keep your credit card receipts and promptly compare them when your bills arrive.)

In your notification letter, include your name, your account number, the amount of the suspected error, and the reason why you believe that the bill contains an error. The card issuer, in turn, must look into the problem and either correct the error or explain to you why the bill is correct. This must occur within two billing cycles and not later than 90 days after the issuer receives your billing error notice.

During the period that the card issuer is investigating the error, you do not have to pay the amount in question. (For further information, write: "Credit Billing Errors," Public Reference, Federal Trade Commission, Washington, D.C. 20580.)

How can I get the most benefit from my credit cards?

Here are some suggestions for the use of credit cards:

1. Pay bills promptly to keep finance charges as low as possible.

   Tip: Keep copies of sales slips and promptly compare charges when your bills arrive.

2. Keep a list of your credit card account numbers and the telephone numbers of each card issuer in a safe place in case your cards are lost or stolen.  
3. Protect your credit cards and account numbers to prevent unauthorized use.

   Tip: Draw a line through blank spaces above the total when you sign receipts. Rip up or retain carbons.

4. Deal only with reliable firms. In doubt? Check with your local consumer protection agency or the Better Business Bureau (BBB) nearest to where the business is located. Study the advertising offer carefully. Ask the company about its warranty, refund and exchange policies.

   Tip: Pay by money order, check, charge or credit card so you have a record of your purchase.

5. Never send cash. Keep the ad you responded to and a copy of the order form. If there is no order form, make your own notes with the company's name, address, phone number, date, amount, the item you purchased, and any delivery date that may have been promised.
6. Never give out your credit, debit, charge card or bank account numbers unless you've checked out the company or have done business with it before.

What restrictions and limitations can a merchant impose before accepting my credit card?

Many merchant practices violate your privacy and expose you to potential credit fraud, and therefore are illegal in many states.

To protect you privacy and avoid being defrauded by credit card crooks, say "no" to a merchant who engages in these impermissible credit card practices:

• Writes your credit card number on your personal check
• Writes your personal information on a bank credit card sales slip
• Imposes a minimum sales amount for credit card purchases
• Charges extra for payment by credit card.

Note: Giving a discount for cash payments is allowed.

How can I stop junk mail or telemarketing calls?

You have the right to tell commercial telephone and direct mail marketers to stop calling you, and to sue in Small Claims Court if they continue to call. If you request it, the Direct Marketing Association--through its Mail or Telephone Preference Services--will ask subscribing companies to take your name off their lists.

Here’s how to register with the Direct Marketing Association: Mail a letter requesting removal from mailing or telemarketing lists to the two addresses below. Include your name, address, city, state, zip code, and phone number.

• Telephone Preference Service
  Direct Marketing Associations
  Box 9014
  Farmingdale, NY 11735-9014
• Mail Preference Service
  Direct Marketing Association
  Box 9008
  Farmingdale, NY 11735-9008

If companies you now do business with also remove your name, you can contact them directly to have your name reinstated. Keep records. If the marketer calls again, you can sue. You may have additional legal rights under state or local law.

Tip: If you receive unordered merchandise in the mail, consider it a gift and don’t feel pressure to pay for it.

© CPA Site Solutions

Examine The Card's Terms

To choose a credit card wisely, you must first review and understand the terms and features of the various cards. This can can add up to very respectable savings over a period of time. In addition, you should also know how use your cards wisely to keep your costs to a minimum. The Guide explains how to achieve these goals.

Chances are you have received offers in the mail asking if you would like to open credit card accounts. Frequently, these offers say that you have been "pre-approved" for the card, often with a very attractive interest rate (usually, a short-term "low-ball" rate) and with a line of credit purportedly set aside for your use (although few people ultimately qualify for the credit line in the promotional literature). Typically, these offers urge you to accept quickly, "before the offer expires." However, before accepting a credit card offer, understand the card's credit terms and compare costs of similar cards to get the terms and features you want.

Making an informed decision about a credit card is largely a matter of finding out what the actual cost of credit is under that card. Credit cards involve not only a "finance charge" — a charge for the convenience of borrowing — but usually other, less obvious charges as well.

Learn which credit terms and conditions apply. Each affects the overall cost of the credit you will be using. Due to the provisions of the Fair Credit and Charge Card Disclosure Act, you can compare terms and fees before you agree to open a credit card or charge card (no interest) account. Be sure to consider and compare the terms listed below, which both direct-mail applications and pre-approved solicitations must reveal.

Which card is best for you may depend on how you plan to use it. If you plan to pay bills in full each month, the size of the annual fee or other fees, and not the periodic and annual percentage rate, may be more important. If you expect to use credit cards to pay for purchases over time, the APR and the balance computation method are important terms to consider. In either case, keep in mind that your costs will also be affected by the grace period.

Annual Percentage Rate

The "annual percentage rate," or APR, is disclosed to you when you apply for a card, again when you open the account, and on each bill you receive. It is a measure of the cost of credit, expressed as a yearly rate.

The card issuer also must disclose the "periodic rate," the rate the card issuer applies to your outstanding account balance to figure the finance charge for each billing period.

Variable Rates

Some credit card plans allow the card issuer to change the annual percentage rate on your account when interest rates or other economic indicators (called indexes) change. Because the rate change is linked to the performance of the index, which may rise or fall, these plans are commonly called "variable rate" plans. Rate changes raise or lower the amount of the finance charge you pay on your account. If the credit card you are considering has a variable rate feature, the card issuer must tell you that the rate may vary and how the rate is determined, including which index is used and what additional amount (the "margin") is added to the index to determine your new rate. You also must be told how much and how often your rate may change.

Free Period

A free period, also called a "grace period," allows you to avoid the finance charge by paying your current balance in full before the due date shown on your statement. Knowing whether a credit card plan gives you a grace period and the length of this period is especially important if you plan to pay your account in full each month.

If there is no free period, the card issuer will impose a finance charge from the date you use your credit card or from the date each credit card transaction is posted to your account. If your credit card allows a grace period, the card issuer must mail your bill at least 14 days before your payment is due. This policy ensures that you have enough time to make your payment by the due date.

CAUTION: The grace period is generally misleading. The period does not start when the statement is mailed and end when your check is received, as many consumers believe. In fact, it usually starts a few days before the statement is mailed and ends a few days after the payment is received, based on certain accounting dates adopted by the credit card company. Consequently, a 25-day grace period (a fairly common period) for paying the statement may water down to a much shorter period.

Annual Fees

Most credit card issuers charge annual membership or other participation fees. These fees range from $25 to $50 for most cards and from $75 on up for premium "gold" or "platinum" cards (with the American Express Platinum costing $300).

Transaction Fees and Other Charges

A credit card also may involve other types of costs. For example, some card issuers charge a fee when you use the card to obtain a cash advance, when you fail to make a payment on time, or when you go over your credit limit. Some charge a flat monthly fee whether or not you use the card.

Balance Computation Method for the Finance Charge

If your plan has no free period or if you expect to pay for purchases over time, it is important to know how the card issuer will calculate your finance charge. This charge will vary depending upon the method the card issuer uses to figure your balance. The method used can make a difference, sometimes a big difference, in how much finance charge you will pay—even when the APR is identical to that charged by another card issuer and the pattern of purchases and payments is the same.

Average Daily Balance

The average daily balance method (including or excluding new purchases) gives you credit for your payment from the day the card issuer receives it. To compute the balance due, the card issuer totals the beginning balance for each day in the billing period and deducts any payments credited to your account that day. New purchases may or may not be added to the balance, depending on the plan, but cash advances typically are added. The resulting daily balances are added up for the billing cycle and the total is then divided by the number of days in the billing period to arrive at the "average daily balance." This is the most common method used by credit card issuers.

Adjusted Balance

This balance is computed by subtracting the payments you made and any credits you received during the present billing period from the balance you owed at the end of the previous billing period. New purchases that you made during the billing period are not included. Under the adjusted balance method, you have until the end of the billing cycle to pay part of your balance and you avoid the interest charges on that portion. Some creditors exclude prior, unpaid finance charges from the previous balance. The adjusted balance method usually is the most advantageous to card users.

Previous Balance

As the name suggests, this balance is simply the amount that you owed at the end of the previous billing period. Payments, credits, or new purchases made during the current billing period are not taken into account. Some creditors also exclude unpaid finance charges in computing this balance. If you do not understand how the balance on your account is computed, ask the card issuer. (An explanation of how the balance was determined must appear on the billing statements the card issuer provides you and on applications and pre-approved solicitations the card issuer may send you.)

Considerations Other Than Cost

When shopping for a credit card, you probably will want to look at other factors besides cost—such as whether the credit limit is high enough to meet your needs, how widely the card is accepted, and what services and features are available under the plan. You may be interested, for example, in "affinity cards," all-purpose credit cards that are sponsored by professional organizations, college alumni associations, and some members of the travel industry. Frequently, an affinity card issuer donates a portion of the annual fees or transaction charges to the sponsoring organization or allows you to qualify for free travel or other bonuses.

How Different Balance Computations Affect The Cost of Credit

"While the interest rate is a major factor in determining your interest cost, the method of computing the balance to which the interest rate is applied can also be significant. The following table shows how your interest cost can vary when the Average Daily Balance, Adjusted Balance and Previous Balance methods are used."

	Average Daily Balance (including new purchases)	Average Daily Balance (excluding new purchases)
Monthly rate	1-1/2%	1-1/2%
APR	18%	18%
Previous Balance	$400	$400
New and Purchases	$50 on the 18th day	$50 on the 18th day
Payments	$300 on 15th day (new balance = $100)	$300 on 15th day (new balance = $100)
Average Daily Balance	$270*	$250**
Finance Charge	$4.05 (1-1/2% of $270)	$3.75 (1-1/2% of $250)

 

* To figure average daily balance (including new purchases):

       ($400 x 15 days) + ($100 x 3 days) + ($150 x 12 days) divided by 30 days = $270

** To figure average daily balance (excluding new purchases):

       ($400 x 15 days) + ($100 x 15 days) divided by 30 days = $250

	Adjusted Balance	Previous Balance
Monthly rate	1-1/2%	1-1/2%
APR	18%	18%
Previous Balance	$400	$400
Payments	$300	$300
Average Daily Balance	N/A	N/A
Finance Charge	$1.50 (1-1/2% of  $100)	$6.00 (1-1/2% of  $400)

As you can see, the finance charge varies based upon which balance is used and whether new purchases are included or excluded.

Rebate Cards: Are They a Good Deal?

The use of rebates has grown rapidly. About one-quarter of the hundreds of millions of credit cards in use offer rebates. Credit card solicitations promise cash, frequent-flier miles or points that will buy everything from gas to video rentals. Blockbuster, Egghead Software, Sam Goody, Toys "R" Us and Waldenbooks, among others, sponsor credit cards that give rebates on the cost of merchandise you buy with the card, once you send in a rebate form and proof of purchase. You usually get larger rebates on the sponsoring company's products and lower rebates on other card charges.

Tip: You will get a good deal from a rebate card if you spend a lot, and if you pay your bill in full each month. If you carry a balance on the card, what you gain in rebates you will lose in the excessive interest charged by credit cards.

Use It Wisely

Here are some suggestions for the use of credit cards:

1. Pay bills promptly to keep finance charges as low as possible.

Tip: Keep copies of sales slips and promptly compare charges when your bills arrive.

2. Keep a list of your credit card account numbers and the telephone numbers of each card issuer in a safe place in case your cards are lost or stolen.

3. Protect your credit cards and account numbers to prevent unauthorized use.

Tip: Draw a line through blank spaces above the total when you sign receipts. Rip up or retain carbons.

4. Deal only with reliable firms. Check with your local consumer protection agency or the Better Business Bureau (BBB) nearest to where the business is located. Study the advertising offer carefully. Ask the company about its warranty, refund and exchange policies. If you cannot get the answers to your questions, or there are any doubtful claims, don’t buy.

5. Never Send Cash. Never give out your credit, debit charge card, or bank account number unless you have checked out the company or have done business with them before.

Tip: Try to pay by charge or credit card, so that you have record in the event of a dispute with the merchant.

How To Dispute Improper Charges

If there is a problem with your order — you were billed for the wrong amount, you never got the product, the goods arrived in damaged condition, or the merchandise or services were misrepresented—try to resolve it by following these steps:

When you have charged your purchase, you are entitled to a response to your complaint within 30 days, and the problem must be resolved within two billing cycles (but not more than 90 days). If you used a debit card, you are entitled to a response within 10 days. However, if the financial institution that issued the card needs more time, it may take up to 45 days, provided it credits your account with the disputed amount until the dispute is resolved.

1. Write immediately to the company from whom you ordered, explaining the problem and asking for a specific resolution. Be sure to include your name, address, and daytime phone number, your order or invoice number, copy of canceled check, or any other helpful information about your purchase. You generally have 60 days after receiving a bill to dispute charges. Pay any other charges on your bill that you are not disputing.

2. If you charged your purchase to a charge or credit card account, or you arranged for the payment to be automatically withdrawn from a bank account, send a copy of your letter to the card issuer or bank.

Government and Non-Profit Agencies

The following agencies are responsible for enforcing federal laws that govern credit card transactions. Questions concerning a particular card issuer should be directed to the enforcement agency responsible for that issuer.

• State Member Banks of the Reserve System:

Consumer & Community Affairs
Board of Governors of the Federal Reserve System
20th & C Sts., N.W.
Washington, D.C. 20551

• National Banks:

Comptroller of the Currency
Compliance Management
Mail Stop 7-5
Washington, D.C. 20219

• Federal Credit Unions:

National Credit Union Administration
1776 G St., N.W.
Washington, D.C. 20456

• Non-Member Federally Insured Banks:

Office of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth St., N.W.
Washington, D.C. 20429

• Federally Insured Savings and Loans, and Federally Chartered State Banks:

Consumer Affairs Program
Office of Thrift Supervision
1700 G St., N.W.
Washington, D.C. 20552

• Other Credit Card Issuers (includes retail gasoline companies):

Division of Credit Practices
Bureau of Consumer Protection
Federal Trade Commission
Washington, D.C. 20580

• The U.S. Postal Inspection Service:

This office covers mail fraud, sexually offensive materials, solicitations that look like government materials but are not. If you suspect such violations, contact your local Postmaster or Postal Inspector or:

Chief Postal Inspector
U.S. Postal Service, Room 3100
475 L'Enfant Plaza SW
Washington, D.C. 20260-6444
Tel. 800- 654-8896

or

The Consumer Advocate
U.S. Postal Service
Washington, D.C. 20260-2200
Tel. (202) 268-2284

The Federal Trade Commission does not handle individual complaints, but reporting failure to deliver, late delivery, unordered merchandise, misrepresentation or fraud helps uncover widespread abuses that the FTC might take action to stop.

Division of Enforcement
Federal Trade Commission
Washington, DC 20580
Tel. (202) 326-3768

The Federal Communications Commission will handle requests for action on suspected violations of the Telephone Consumer Protection Act, such as persistent sales calls after the seller is told to stop.

Informal Complaints and Public Inquiries Branch
Enforcement Division
Common Carrier Bureau
FCC, Mail Stop 1600A2
Washington D.C. 20554

Mail and Telephone Preference Services should be contacted if you wish to have your name removed from mail or telephone lists of many companies. You may also contact the Direct Marketing Association.

Telephone Preference Service
Direct Marketing Association
P.O. Box 9014
Farmingdale, NY 11735-9014

and

Mail Preference Service
Direct Marketing Association
P.O. Box 9008
Farmingdale, NY 11735-9008

Low-Cost Credit Cards: Bankcard Holders of America lists banks charging no fees and low interest rates for their conventional credit cards. To obtain a copy of the list, write to:

Bankcard Holders of America
524 Branch Drive
Salem, VA 24153

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How will a divorce or separation affect my credit?

Here are some tips for handling the credit aspects of divorce, both in the planning stages and afterwards.

Cancel All Joint Accounts

First, it is important to cancel all joint accounts immediately once you know you are going to obtain a divorce.

Creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If so, try to get the creditor to have the balance transferred to separate accounts.

If Your Spouse’s Poor Credit Affects You

If your spouse's poor credit hurts your credit record, you may be able to separate yourself from the spouse’s information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own. If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage, and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse’s credit record, not yours.

In practice, it is difficult to prove that the credit history under consideration doesn’t reflect your own, and you may have to be persistent.

For Women: Maintain Your Own Credit—Before You Need It

If a woman divorces, and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply. (The account remains open.)

Maintaining credit in your own name avoids this inconvenience. It can also make it easier to preserve your own, separate, credit history. Further, should you need credit in an emergency, it will be available.

Do not use only your spouse’s name—e.g., Mrs. John Wilson--for credit purposes.

Tip: Check your credit report if you haven't done so recently. Make sure the accounts you share are being reported in your name as well as your spouse's. If not, and you want to use your spouse's credit history to build your own, write to the creditor and request the account be reported in both names.

Also, determine if there is any inaccurate or incomplete information in your file. If so, write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

If you used your spouse’s accounts, but never co-signed for them, ask to be added on as jointly liable for some of the major credit cards. Once you have several accounts listed as references on your credit record, apply for a department store card, or even a Visa or Mastercard, in your own name.

If you held accounts jointly and they were opened before 1977 (in which case they may have been reported only in your husband's name), point them out and tell the creditor to consider them as your credit history also. The creditor cannot require your spouse's or former spouse's signature to access his credit file if you are using his information to qualify for credit.

Tip: A secured credit card is a fairly quick, easy way to get a major credit card if you do not have a credit history.

What factors affect my credit rating?

Your credit rating is affected by a number of different factors, some obvious and others few consumers are aware of. These are discussed below.

• Whether you have a credit card or use another person's credit card
• Whether you have a bank checking or savings account
• Where you live
• Your age
• Your debt-income ratio
• Whether you have declared bankruptcy or have had "charge-offs" to your account
• Whether you are delinquent in any child support payments
• Whether you have "too much" credit available

Does having a credit card or using another person's credit card improve my credit rating?

One of the best things you can have on a credit report is a bank credit card-- such as a Visa, MasterCard or Discover card —that has been paid on time over a specified period in the past. In a credit scoring system, a good bank card reference usually carries more weight than an American Express card or a department store card.

If you are an authorized user (someone who has permission to use a credit card, but is not legally liable for the bills) on someone else's account, the payment history will likely be reported in your credit file, but you won’t be able to rely on it to help you build your own credit rating. Usually, it will neither help you nor hurt you when you apply for a loan.

Does having a bank account improve my credit rating?

A checking or savings account will usually enhance your credit rating. Some banks give you extra points in applying for their credit card if you have a checking or savings account with them. In fact, some banks also give discounts on loan rates when you hold other accounts with them.

Is my credit rating affected by where I live?

Many creditors give a higher score to those who have lived at the same address for at least two years. Others give extra points just for living in the same area for two years or more.

Creditors may take into account your geographic location in scoring your length of time at one address. If you live in a city, where people move more often, the length of time at your address will probably count less than if you live in the country.

If your address is a post office box, you may find yourself turned down for credit. To fight fraud, some creditors screen out applicants whose addresses indicate commercial offices, mail drops or prisons.

Since post office boxes or rural delivery boxes are commonplace in rural areas, a lender may issue a card to that address, while rejecting applicants with a P.O. box in a large city.

People who own their homes usually earn a higher score than renters.

Does my age affect my credit rating?

If a lender's credit experience shows that people in a certain age group have a better record of paying their bills than people of other ages, that lender may, legally, give a higher score to the better-paying age group.

However, the Equal Credit Opportunity Act (ECOA), a federal law intended to prevent discrimination in lending, does not allow lenders to discriminate against people age 62 or over. The ECOA requires creditors using a scoring system to give those aged 62 and older an age-factor score at least as high as the best score given to anyone under age 62.

How important is my debt-income ratio in determining my credit-worthiness?

Some creditors look at your "debt/income ratio" to determine whether you qualify for credit and how much credit you qualify for.

To find your debt/income ratio, total up your monthly payments on all bills. Then, divide these payments by your monthly gross income (before tax). This is your debt/income ratio.

If it’s less than 28%, you should have no trouble getting a loan (and can consider yourself successful at managing your debt and maintaining a good credit rating). If it falls between 28% and 35%, you have what’s considered high debt, and you may find it difficult to obtain some loans. If your debt/income ratio is 35% or more, you will probably not be able to get additional credit. More importantly, you are potentially in financial jeopardy.

Keep in mind that these are general guidelines. Some large card issuers will accept debt ratios as high as 40-45%. Others compare your net (after-tax) income to your debts to determine your debt ratio.

Tip: In determining your debt/income ratio, do not include payments for your mortgage, utility bills, doctor bills or other items that do not appear on your credit report: The creditor will not look at these.

If you should incur unexpected expenses, get ill, lose your job, or get divorced, you could find yourself unable to meet your obligations. Consider seeking credit counseling through a local non-profit consumer credit counseling service.

Will bankruptcies or "charge-offs" affect my credit rating?

Most lenders (but not all) will automatically reject you if your application or credit file indicates a bankruptcy. Both types of bankruptcy - Chapter 13 (the wage-earner's plan under which all debts are eventually repaid) and Chapter 7 (straight bankruptcy) - remain in your credit files for ten years. Few creditors draw any distinction between the two types, so you don't get any "credit" for having repaid your bills using Chapter 13.

In addition to the bankruptcy itself remaining on your report for ten years, each separate account that was discharged through bankruptcy can be reported in your file for up to seven years.

"Charge-offs" (accounts written off as "uncollectible") and "collection accounts" (accounts sent either to the creditor's own collection department or to an outside collection agency) are extremely negative.

Note: If an account that has been charged-off (other than for bankruptcy), the creditor will usually turn it over to a collection agency, which will then attempt to collect. It then becomes a "collection account" for reporting purposes.

Tip: If you pay the charged-off amount, make sure the creditor updates the account as a "paid charge-off."

Tip: In exchange for paying off a collection account, you may be able to negotiate with the creditor or collection agency the permanent removal of the negative information from your credit bureau files. However, lenders are under no obligation to make such an agreement.

Will delinquent child support payments affect my credit?

Delinquent child support frequently appear on credit reports. In 1984, Congress amended the federal Child Support Enforcement (CSE) legislation to require more routine reporting of delinquent payments.

State child support enforcement agencies must report overdue child support to a credit bureau that requests such information, as long as the amount exceeds $1,000. CSE agencies may also report delinquencies of any amount on a voluntary basis.

Before a CSE agency reports your delinquent child support debts to a credit bureau, it must tell you that it is going to do so and provide you with information on how to dispute the delinquency.

Can my credit rating be negatively affected by having too much available credit?

You may be turned down for a loan because you have too much available credit. When creditors evaluate your application for credit, they ascertain whether, if you were to use all your available credit, you would be over your head

Accounts you no longer use, or have paid off, can count against you if they are listed as "open" on a credit report. The act of paying off a revolving account does not, in itself, result in its being "closed" in the eyes of creditors. Further, some creditors do not report to credit bureaus the fact that accounts are closed.

Tip: Every time you close an account, ask the creditor to report it as "closed by consumer" to all credit bureaus to which the account has previously been reported. If a closed account appears on your credit report as open, dispute the entry with the credit bureau.

In determining whether you have too much available credit, creditors usually consider:

• The number of accounts you hold. As noted above, having too many credit card accounts can count against you.
• The total credit you have available. Having too much available credit can count against you.

Conversely, being at or near the limit on your credit cards (i.e., with little available credit) can also count against you if it suggests that you have incurred too heavy a debt load.

© CPA Site Solutions

How can I check my credit report?

Mistakes on credit reports occur frequently. They might be caused by stolen or unauthorized use of credit cards, other individuals with the same name, or a creditor reporting something in the wrong way. Thus, you should check your credit report periodically.

To check your report, call or write any of the major credit bureaus:

Equifax
Information Service Center
P.O. Box 740241
Atlanta, GA 30374-0241
1-800-685-1111

Trans Union Corporation
Consumer Disclosure Center
P.O. Box 390
Springfield, PA 19064-0390
1-800-851-2674

When writing, send your full name, including middle initial and generation (e.g., Jr., Sr., II or III); any maiden name; your current address; addresses for the past five years; Social Security number; and date of birth. Sign your request. In the case of TRW and Equifax, you must enclose proof of your current address (e.g., a photocopy of your driver's license.)

According to federal law, you are entitled to a free report within 60 days of being denied credit, employment, insurance, or rental housing. Ask which credit bureau supplied the information. You also are entitled to a free report once a year if you are unemployed, on welfare, or believe there are inaccuracies in your report as a result of fraud.

What if there is an error on my credit report?

By law (under the Fair Credit Reporting Act) you have the right to correct inaccurate information in your credit file. You must dispute your report directly to the credit reporting agency.

Tip: Although the Fair Credit Reporting Act does not require it, submit your dispute in writing, along with copies (not originals) of documents that support your position.

In addition to providing your complete name and address, your letter should clearly identify each item in your report that you dispute, explain why you dispute the information, state the facts, and request deletion or correction. You may want to enclose a copy of your report with the items circled.

Tip: Send your dispute by certified mail, return receipt requested, and keep copies of your dispute letter and enclosures. By doing so, you can document what the credit reporting agency received.

Tip: Once you have corrected the mistake at one credit bureau, check others, since they do not correct each other's files. Find out the names of other credit bureaus to which the creditor involved reports, and have the information corrected at each of them.

There is nothing you can do to get a credit bureau to remove accurate information from your credit file until the reporting period has expired. Credit reporting agencies are permitted to report bankruptcies for ten years, and other negative information for seven years.

Tip: If you are divorced and suffering the consequences of a credit rating damaged during the marriage, you may be able to obtain relief if the bad credit rating was your spouse's fault and you can prove it. According to the Equal Credit Opportunity Act, a lender must consider any evidence you have showing that your spouse-not you-was the irresponsible one.

How can I build a credit history so that I can establish credit?

It may take time to establish your first credit account if you have no reported credit history. This problem affects mainly (1) young people, (2) older people who have never used credit, and (3) divorced or widowed women who shared credit accounts reported only in the husband's name.

Here are some steps you can take:

• Check with a credit bureau to find out what is in your credit report.

  Tip: If you have had credit before under a different name or in a different location and it is not reported in your file, ask the credit bureau to include it. Although credit bureaus are not required to add new accounts to your file, many will do so for a fee. 

  Tip: If you currently share a credit account with your spouse, ask the creditor to report it under both names

• When contacting your creditor or credit bureau, do so in writing and include relevant information, such as account numbers, to speed the process. As with all important business communications, keep a copy of what you send.
• Build a credit history by applying for credit with a local business, such as a department store, or borrow a small amount from your credit union or the bank where you have checking and savings accounts. A local bank or department store may approve your credit application even if you do not meet the standards of larger creditors.
• If you are rejected for credit, find out why. There may be reasons other than lack of credit history. Your income may not meet the creditor's minimum requirement or you may not have worked at your current job long enough.

  Tip: Wait at least six months before making each new application. Credit bureaus record each inquiry about you. Some creditors may deny your application based on your having too many credit inquiries.

  Tip: If you still cannot get credit, ask someone with an established credit history to act as your co-signer. Then, once you have repaid the debt, try again to get credit on your own. Alternatively, you may wish to consider a secured credit card.

Who can see my credit file?

The Fair Credit Reporting Act allows access to your credit file only by the following: those authorized in writing by you, creditors to whom you are applying for credit, insurers, potential employers, and those who have a "legitimate business purpose related to a business transaction involving you."

In addition, government agencies can obtain identifying information about you. This is limited to your name, current and former addresses, and current and former places of employment.

Every time someone requests a copy of your credit report, it is noted as an "inquiry" on your credit file. You are entitled to know who has requested your credit file within the past six months (or two years if for employment purposes). This information is provided when you order a copy of your credit report.

Tip: In addition to checking on the information in your report, review who has seen your file. Credit bureaus must establish procedures to keep anyone without a legitimate business purpose from obtaining your report, but unauthorized access to credit files does sometimes occur.

How can I decipher my credit report?

Credit reports contain symbols and codes that are "Greek" to the average consumer. Every credit bureau report also includes a key explaining each code. Some of these keys decipher the information, while others just cause more confusion.

Read your report carefully, making a note of anything you do not understand. The credit bureau is required by law to provide trained personnel to explain it to you. If accounts are identified by code number, or if there is a creditor listed on the report that you do not recognize, ask the credit bureau to supply you with the name and location of the creditor so you can ascertain if you do indeed hold an account with that creditor.

It is vital that you understand every piece of information on your credit report in order that you be able to identify possible errors or omissions.

Here is a summary of what the various codes mean:

The Equal Credit Opportunity Act (ECOA) requires creditors who report information about accounts to report it in the names of all people with a relationship to the account, including cosigners or authorized users. To help lenders identify your legal liability on all your credit accounts, credit bureaus add a code to each account, termed the ECOA code.

Each credit bureau lists ECOA codes differently, but these are the basic categories:

Individual. You alone are legally responsible. This designation gives you a strong credit reference, assuming a good history.

Joint. You and someone else - often a spouse – are both legally liable. A joint account is equal to an individual account for building your credit history. You and someone else - often a spouse – are both legally liable. A joint account is equal to an individual account for building your credit history. You and someone else - often a spouse – are both legally liable. A joint account is equal to an individual account for building your credit history.

Cosigner. You signed loan documents for someone else, to help them qualify for a loan.

Cosigner, primarily liable: You took out an account for yourself, but someone else co-signed for the loan to ensure payment.

Authorized user. You can use the account, and may have a card in your name, but you did not sign the application and are not legally responsible. Because you have no legal obligation, this designation does not help you get your own credit history. You can use the account, and may have a card in your name, but you did not sign the application and are not legally responsible. Because you have no legal obligation, this designation does not help you get your own credit history. You can use the account, and may have a card in your name, but you did not sign the application and are not legally responsible. Because you have no legal obligation, this designation does not help you get your own credit history.

Undesignated. No status was reported by the creditor reporting the account information.

Inquiries. Inquiries, which appear at the end of your credit report, tell you who has seen it recently. They are very important when you apply for credit. Lenders almost always look at how many inquiries you have when evaluating your application. Consumers with "too many inquiries" are often turned down, due to a concern that they are applying for too much credit at one time, that they are on a spending spree, or that there is potential fraud.

The consumer credit laws do not cover inquiries, so once they are on your file there is nothing you can do to have them removed. It’s always worth trying to challenge inquiries with the credit bureau, but be aware that many credit bureaus refuse to investigate them. If you have too many inquiries, you may simply have to wait six months before applying for more credit. Inquiries generally stay on credit reports for two years.

Some credit bureaus list inquiries by code, rather than by the name of the company. The Fair Credit Reporting Act requires that a credit bureau explain all information on your report that you do not understand, so request names for all the coded companies listed under the inquiries section.

If an inquiry is coded "PRM" or "PSC," or has the word "promotional" next to it, it means that a lender has paid the credit bureau to screen suitable prospects for a "pre-approved" mailing. The lender supplies the bureau with a list of names and addresses and a set of credit criteria, and asks the bureau to determine which candidates meet their criteria. The lender then receives from the credit bureau a list of the names that meet the qualifications, and those consumers receive a "pre screened" or "pre-approved" credit offer.

Inquiries noted as "csmr" or "consumer," indicate you have seen your own credit file.

It is the policy of the major credit bureaus not to include promotional or consumer inquiries when transmitting the file to a lender, so review of your own file or pre-screening will not hurt your chances of getting credit.

Tradelines. "Tradelines" is credit-industry jargon for "accounts." Tradelines are the listings of accounts that appear on credit reports. Each account you hold is considered a separate tradeline.

© CPA Site Solutions

Having trouble paying your bills? Getting dunning notices from creditors? Are your accounts being turned over to debt collectors? Are you worried about losing your home or your car?

You're not alone. Many people face a financial crisis some time in their lives. Whether the crisis is caused by personal or family illness, the loss of a job, or overspending, it can seem overwhelming. But often, it can be overcome. Your financial situation doesn't have to go from bad to worse.

If you or someone you know is in financial hot water, consider these options: realistic budgeting, credit counseling from a reputable organization, debt consolidation, or bankruptcy.

Debt negotiation is yet another option. How do you know which will work best for you? It depends on your level of debt, your level of discipline, and your prospects for the future.

Source: Federal Trade Commission

The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies - Equifax, Experian, and TransUnion - to provide you with a free copy of your credit report, at your request, once every 12 months.

You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order your report from each of the companies one at a time. The law allows you to order one free copy of your report from each of the nationwide consumer reporting companies every 12 months.

Should I prepay my mortgage?

As a general rule, if you are able to prepay your mortgage (and if there is no penalty for doing so) you should prepay as much as you can every month. Here are some exceptions to the general rule:

1. You do not have an emergency fund stashed away—three to six months' worth of expenses. All extra funds should be put towards this cache. You can begin paying down your mortgage afterwards.
2. You have a large amount of credit card debt. In such case, all of your extra funds should be used to pay down those debts.

There are a few individuals who may be better off not paying down their mortgages, since they will achieve a better return by investing that money elsewhere. Whether an investor fits into this category depends on his or her marginal tax rate, mortgage interest rate, return achievable on an investment, and long-term investment goals.

When should I refinance my home?

Refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. Talk to some lenders to determine the available rates and the costs associated with refinancing. These costs include appraisals, attorney's fees, and points.

Once you know what the costs will be, determine what your new payment would be if you refinanced. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings).

Be aware that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

Should I borrow against my securities?

Borrowing against your securities can be a low-cost way to borrow money. No deduction is allowed for the interest unless the loan is used for investment or business purposes.

Tip: If your margin debt exceeds 50% of the value of your securities, you will be subject to a margin call, which means that you will have to come up with cash or sell securities. If the market is falling at the time, a margin call can cause a financial disaster. Therefore, we recommend against use of margin debt, unless the amount is kept way below 50%. We think 25% is a safe percentage.

What is a home equity line of credit?

A home equity line is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills--not for day-to-day expenses.

With a home equity line, you will be approved for a specific amount of credit— your credit limit—meaning the maximum amount you can borrow at any one time while you have the plan.

Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example:

Appraisal of home	$100,000
Percentage	x 75%
Percentage of appraised value	$75,000
Less mortgage debt	-40,000
Potential credit line	$35,000

In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, and other financial obligations, as well as your credit history.

Once approved for the home equity plan, you will usually be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks.

Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line--for example, $300--and to keep a minimum amount outstanding.

What are the costs of obtaining a home equity line of credit?

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home. For example these fees may be charged:

• A fee for a property appraisal, which estimates the value of your home
• An application fee, which may not be refundable if you are turned down for credit
• Up-front charges, such as one or more points (one point equals one percent of the credit limit)
• Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes
• Yearly membership or maintenance fees

You also may be charged a transaction fee every time you draw on the credit line.

What is an interest rate "lock-in"?

If you decide to apply for financing with a particular lender, and if you do not want to let the interest rate "float" until closing, get a written statement guaranteeing the interest rate and the number of discount points that you will pay at closing. This binding commitment or "lock-in" ensures that the lender will not raise these costs even if rates increase before you settle on the new loan. You also may consider requesting an agreement where the interest rate can decrease but not increase before closing. If you cannot get the lender to put this information in writing, you may wish to choose one who will.

Most lenders place a limit on the length of time (say, 60 days) they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people are refinancing their mortgages, there may be a delay in processing the papers. Therefore, contact your loan officer periodically to check on the progress of your loan approval and to see if information is needed.

What disclosures must a lender give you?

For a financing, the lender must give you a written statement of the costs and terms of the financing before you become legally obligated for the loan, as required by the Truth in Lending Act. You usually will receive the information around the time of settlement, although some lenders provide it earlier.

Tip: Review this statement carefully before you sign the loan. The disclosure tells you the APR, finance charge, amount financed, payment schedule, and other important credit terms.

If you refinance with a different lender, or if you borrow beyond your unpaid balance with your current lender, you also must be given the right to rescind the loan. In these loans, you have the right to rescind or cancel the transaction within three business days following settlement, receipt of your Truth in Lending disclosures, or receipt of your cancellation notice, whichever occurs last.

What is a reverse mortgage?

A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you continue to own the home. Reverse mortgages operate like traditional mortgages, only in reverse. Rather than paying your lender each month, the lender pays you. Reverse mortgages differ from home equity loans in that most reverse mortgages do not require any repayment of principal, interest, or servicing fees as long as you live in the home.

The reverse mortgage's benefit is that it allows homeowners who are age 62 and over to keep living in their homes and to use their equity for whatever purpose they choose. A reverse mortgage might be used to cover the cost of home health care, or to pay off an existing mortgage to stop a foreclosure, or to support children or grandchildren.

Note: Reverse mortgages are now available in every state except Alaska, South Dakota and Texas. But willing lenders may still be scarce in some places.

When the homeowner dies or moves out, the loan is paid off by a sale of the property. Any leftover equity belongs to the homeowner or the heirs.

What loan interest is tax-deductible?

The deductibility of interest has been limited in recent years. The following types of interest are at least partially deductible:

• Mortgage interest
• Business interest
• Investment interest
• Education related interest

What are the limitations on deductibility of mortgage interest?

Generally, interest expense on the taxpayers primary residence and a second (but not a third) home is deductible. Interest is only deductible on the first $1,000,000 of the acquisition loan. As the loan is paid off the limit is reduced. In other words you can not refinance a loan for a higher amount than the current principal balance and increase the deduction. In addition interest on a home equity loan of up to $100,000 can be deducted.

Is interest expense incurred for business purposes deductible?

Yes. Interest expense incurred for a trade or business is deductible against the income of that business. For example, if your are self-employed the business interest would be deducted on Schedule C.

Is investment related interest expense deductible?

Yes. Investment interest is deductible up to the amount of investment income.

When can you stop paying private mortgage insurance?

Generally, if you make a down payment of less than 20% when buying a home, the lender will require you to buy private mortgage insurance. You can generally drop the PMI when you have attained 20% equity in the home, or when the value of your home goes up (due to a good real estate market) so that your equity constitutes 20%.

Some lenders require you to keep the PMI forever, and others make you keep it at least five years.

To find out whether you can cancel the coverage, send a letter to your mortgage servicing company (the company to which you send your mortgage payments). This will get the process started. You may be required to pay for an appraisal, and you will need to have a good payment record.

If you are able to cancel the insurance, you will receive any prepaid premiums that are in your escrow account.

Source: CPA Site Solutions

How can I tell whether I have too much debt?

If you answer yes to any one of the following questions, you should take action:

• Have you run several credit cards up to the limit?
• Do you frequently make only the minimum monthly payments?
• Do you apply for almost any credit card you are offered--without checking out the terms?
• Have you used the cash advance feature from one card to pay the minimum payment on another?
• Do you use cash advances (or a credit card) for living expenses such as food, rent, or utilities?
• Are you unable to say what your total debt is?
• Are you unable to say how long it would take you to pay off all your current debts (excluding mortgages and cars) at the rate you have been paying?

If you find several of these statements describe your credit habits, it may be that you need to take steps to manage your debt before bill collectors start calling and your credit history is endangered.

What steps should I take if I get into financial trouble?

Here are some specific steps you can take if you are in financial trouble:

1. Review each debt that creditors claim you owe to make certain you really owe it, and that the amount is correct.
2. Contact your creditors to let them know you're having difficulty making your payments. Tell them why you're having trouble. Try to work out an acceptable payment schedule with your creditors.

   Tip: Do not wait until your account is turned over to a debt collector. At that point, the creditor has given up on you. As soon as you find that you cannot make your payments, contact your creditors to try to work out a reduced-payment plan.

3. Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and health care) and optional expenses (such as entertainment and vacation travel). Stick to the plan.
4. Try to reduce your expenses. Cut out any unnecessary spending such as eating out and expensive entertainment. Consider taking public transportation rather than owning a car. Clip coupons, purchase generic products at the supermarket, and avoid impulse purchases. Above all, stop incurring new debt. Consider substituting a debit card for your credit cards.
5. Use your savings and other assets to pay down debts. Withdrawing savings from low-interest accounts to settle high-rate loans usually makes sense.

   Tip: Selling off a second car not only provides cash but also reduces insurance and other maintenance expenses.

   Tip: If you are unable to make satisfactory arrangements with your creditors, there are organizations to help you with your financial situation. For instance, Consumer Credit Counseling Service (CCCS) agencies, which are local, non profit organizations affiliated with the National Foundation for Consumer Credit (NFCC), provide education and counseling to families and individuals.

   To contact a CCCS office for confidential help, look in your telephone directory white pages, or call 1 (800) 388-2227, 24 hours a day, for an office near you. Or write to the National Foundation for Consumer Credit, 8611 2nd Ave., Suite 100, Silver Spring, MD 20910. 

   Tip: Some people with debt problems have found that Debtors Anonymous, General Service Board, Box 400, Grand Central Station, New York, NY 10163-0400, has provided helpful service.

Personal bankruptcy, a serious step, should be considered only if other means have been exhausted, and only if it is the best way to deal with financial problems. A skilled and trusted bankruptcy lawyer should be consulted.

What can I do if I am being hounded by a debt collector?

If you fall behind in paying your creditors, or an error is made on your accounts, you may be contacted by a "debt collector." The Fair Debt Collection Practices Act prohibits certain practices by debt collectors.

What to do: To stop a debt collector from calling you, write a letter to the collection agency telling them to stop. Once the agency receives your letter, it may not contact you again except to say there will be no further contact. Another exception is that the agency may notify you if the debt collector or the creditor intends to take some specific action.

If you believe a debt collector has violated the law by harassing you, you have the right to sue a collector in a state or federal court within one year from the date you believe the law was violated. The following practices are specifically prohibited.

Harassment, Oppression, or Abuse. For example, debt collectors may not:

• Use threats of violence or harm against the person, property, or reputation
• Publish a list of consumers who refuse to pay their debts (except to a credit bureau)
• Use obscene or profane language
• Repeatedly use the telephone to annoy someone
• Telephone people without identifying themselves
• Advertise your debt

False Statements. For example, debt collectors may not:

• Give false credit information about you to anyone
• Send you anything that looks like an official document from a court or government agency when it is not
• Use a false name
• Falsely imply that they are attorneys or government representatives
• Falsely imply that you have committed a crime
• Falsely represent that they operate or work for a credit bureau
• Lie about the amount of your debt
• Lie about the involvement of an attorney in collecting a debt
• Indicate that papers being sent to you are legal forms when they are not
• Indicate that papers being sent to you are not legal forms when they are
• Tell you that you will be arrested if you do not pay your debt
• Tell you they will seize, garnish, attach, or sell your property or wages, unless the collection agency or creditor intends to do so, and it is legal to do so
• Tell you that actions, such as a lawsuit, will be taken against you, which legally may not be taken, or which they do not intend to take

Unfair Practices. For example, collectors may not:

• Collect any amount greater than your debt, unless allowed by law
• Deposit a post-dated check prematurely
• Make you accept collect calls or pay for telegrams
• Take or threaten to take your property unless this can be done legally
• Contact you by postcard

What are my rights against banks, creditors and debt collectors?

You have the following rights:

• Banks. If you have a complaint about a bank in connection with any of the Federal credit laws—or if you think any part of your business with a bank has been handled in an unfair or deceptive way—you may get advice and help from the Federal Reserve.

  Tip: You should submit your complaint—in writing whenever possible—to the Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, Washington, D.C. 20551, or to the Reserve Bank nearest you. Be sure to describe the bank practice you are complaining about and give the name and address of the bank involved.

• Credit Clinics. File a complaint with the Better Business Bureau, your state attorney general's office, and the Federal Trade Commission (FTC).
• Debt Collectors. Report any problems you have with a debt collector to your state Attorney General's office and the Federal Trade Commission.
• Other Institutions. The Federal Trade Commission enforces a number of federal laws involving consumer credit, including the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Fair Credit Billing Act, and the Fair Debt Collection Practices Act.

  You may also take legal action against a creditor. If you decide to bring a lawsuit, here are the penalties a creditor must pay if you win:

• Truth in Lending and Consumer Leasing Acts. If any creditor fails to disclose information required under these Acts, or gives inaccurate information, or does not comply with the rules about credit cards or the right to cancel certain home-secured loans, you as an individual may sue for actual damages—any money loss you suffer. In addition, you can sue for twice the finance charge in the case of certain credit disclosures, or, if a lease is concerned, 25 percent of total monthly payments. You may also be entitled to reimbursement for court costs and attorney's fees.
• Equal Credit Opportunity Act. If you think you can prove that a creditor has discriminated against you for any reason prohibited by the Act, you as an individual may sue for actual damages plus punitive damages of up to $10,000.
• Violations by Debt Collectors. You have the right to sue a collector in a state or federal court within one year from the date you believe the law was violated. If you win, you may recover money for the damages you suffered. A group of people also may sue a debt collector and recover money for damages up to $500,000, or one percent of the collector's net worth, whichever is less.
• Fair Credit Billing Act. A creditor who breaks the rules for the correction of billing errors automatically loses the amount owed on the item in question and any finance charges on it, up to a combined total of $50— even if the bill was correct.
• Fair Credit Reporting Act. You may sue any credit reporting agency or creditor for breaking the rules about who may see your credit records or for not correcting errors in your file. A person who obtains a credit report without proper authorization—or an employee of a credit reporting agency who gives a credit report to unauthorized persons—may be fined up to $5,000 or imprisoned for one year, or both.

© CPA Site Solutions

What should I do if a friend or family member asks me to co-sign a loan?

Many people agree to co-sign loans for friends or relatives, as a favor, as a vote of confidence, or because they just can't say no. Unfortunately, they often find that they've bitten off more than they intended to chew.

The cosigner of a loan agrees to be responsible for its repayment along with the borrower. While a lender will generally seek repayment from the debtor first, it can go after the cosigner at any time. (On the other hand, where a loan is guaranteed, the lender can usually go after the guarantor only after the principal debtor has actually defaulted.)

Finance companies report that most cosigners end up paying off the loans they've cosigned—along with late charges, legal fees and all. Not only is this an unwanted out-of-pocket expense, but it can also be an undeserved blot on the cosigner's credit record.

It's better to guarantee a loan than to cosign it. However, if you're willing to cosign a loan, at least seek the lender's agreement to refrain collecting from you until the borrower actually defaults and try to limit your liability to the unpaid principal at the time of default. Then stay on top of the borrower's financial situation to help avoid a default (for example, have the lender notify you whenever a payment is late). At least you can preserve your credit rating by nipping payment problems in the bud.

Cosigning An Account. You may be asked to cosign an account to allow someone else to obtain a loan. With cosigning, your payment history and assets are used to qualify the cosigner for the loan.

Tip: We recommend that you do not cosign a loan, whether for a family member, friend, or employee. Many have found that cosigning a loan only leads to trouble.

Bear in mind that cosigning a loan bears all the financial and legal consequences of taking out the loan yourself. When you cosign, you are signing a contract that makes you responsible for the entire debt. If the other cosigner does not pay, or makes late payments, it will probably show up on your credit record. If the person for whom you cosigned does not pay the loan, the collection company will be entitled to try to collect from you.

If the cosigned loan is reported on your credit report, another lender will view the cosigned account as if it were your own debt. Further, if the information is correct, it will remain on your credit report for up to seven years.

Tip: If someone asks you to cosign a loan, suggest other alternatives--such as a secured credit card—by which they can build a credit history. If you are asked to cosign for someone whose income is not high enough to qualify for a loan, you are actually doing them a favor by refusing—they will be less likely to be overwhelmed by too-high debts. At any rate, consult with your lawyer before cosigning, since state laws regarding a cosigner's liability vary.

Tip: If you have already cosigned for someone, and he or she is not making payments on time, consider making the payments yourself and asking the cosigner to pay you directly, in order to protect your credit rating.

How can I get the best deal on a home equity loan or an equity line of credit?

If you decide to apply for a home equity loan, look for the plan that best meets your particular needs. Look carefully at the credit agreement and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs you'll pay to establish the plan.

Tip: The disclosed APR will not reflect the closing costs and other fees and charges, so compare these costs, as well as the APRs, among lenders.

Interest Rates. Home equity plans typically involve variable interest rates rather than fixed rates. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate). The interest rate will change, mirroring fluctuations in the index.

To figure the interest rate that you will pay, most lenders add a margin, such as 2 percentage points, to the index value.

Tip: Because the cost of borrowing is tied directly to the index rate, find out what index and margin each lender uses, how often the index changes, and how high it has risen in the past.

Sometimes lenders advertise a temporarily discounted rate for home equity loans—a rate that is unusually low and often lasts only for an introductory period, such as six months.

Variable rate plans secured by a dwelling must have a ceiling (or cap) on how high your interest rate can climb over the life of the plan. Some variable-rate plans limit how much your payment may increase, and also how low your interest rate may fall.

Some lenders permit you to convert a variable rate to a fixed interest rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan.

Agreements generally permit the lender to freeze or reduce your credit line under certain circumstances, such as during any period the interest rate reaches the cap.

What are the costs of obtaining a home equity line of credit?

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home.

For example, these fees may be charged:

• A fee for a property appraisal, which estimates the value of your home
• An application fee, which may not be refundable if you are turned down for credit
• Up-front charges, such as one or more points (one point equals one percent of the credit limit)
• Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes
• Yearly membership or maintenance fees

You also may be charged a transaction fee every time you draw on the credit line.

You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed.

On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit.

The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs.

Should I obtain a home equity line of credit or a traditional second mortgage loan?

If you are thinking about a home equity line of credit you might also want to consider a traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time.

Tip: Consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at the APR and other charges.

Tip: Do not simply compare the APR for a traditional mortgage loan with the APR for a home equity line--the APRs are figured differently. The APR for a traditional mortgage takes into account the interest rate charged plus points and other finance charges. The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

How should I determine which of several loan alternatives is best?

Use the legally-required disclosures of loan terms to compare the costs of home equity loans.

The Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. In general, neither the lender nor anyone else may charge a fee until after you have this information.

You usually get these disclosures when you receive an application form, and you will get additional disclosures before the plan is opened. If any term has changed before the plan is opened (other than a variable-rate feature), the lender must return all fees if you decide not enter into the plan because of the changed term.

Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you—in writing and before you sign any agreement—the finance charge and the annual percentage rate.

The finance charge is the total dollar amount you pay to use credit. It includes interest costs, and other costs, such as service charges and some credit-related insurance premiums.

For example, borrowing $100 for a year might cost you $10 in interest. If there were also a service charge of $1, the finance charge would be $11.

The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it:

Example: You borrow $100 for one year and pay a finance charge of $10. If you can keep the entire $100 for the whole year and then pay back $110 at the end of the year, you are paying an APR of 10 percent. But, if you repay the $100 and finance charge (a total of $110) in twelve equal monthly installments, you don't really get to use $100 for the whole year. In fact, you get to use less and less of that $100 each month. In this case, the $10 charge for credit amounts to an APR of 18 percent.

All creditors—banks, stores, car dealers, credit card companies, finance companies— must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure--before you sign a credit contract or use a credit card--so you can compare costs.

Source: CPA Site Solutions