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Business Credit Card Debt – A Few Tips

Credit card debt is not only a problem  for individual consumers, but for small businesses as well. A study conducted by the Ewing Marion Kauffman Foundation revealed that having credit card debts reduce a new business’s capability to survive over the short term. Research indicates that during the first years of operation, these new businesses experience an increase in their debt before it stabilizes.

But why would new businesses use credit cards to finance business expenses? According to Robert Litan, the vice president for research and policy at the research firm, “Small businesses’ access to formal credit market historically has been limited, a situation that has been exacerbated with the recent contraction of credit markets”.

Over a half of new companies now rely on unsecured debt for their needs because of its ready access. It is also a lot easier to get than traditional business loans. Common sense tells us that the high interests charged by the bank makes it difficult for a start-up to repay significant debt loads in a short timeframe. That’s the reason why programs like business loans, auto loans, and other traditional loans exist in the market. They have lower interest rates suitable for the intended purpose.

Before you give up on your new venture or unmanageable credit card debts, here are some tips that can help you:

Improve Your Cash Flow – cash flow is a problem most new businesses face due to insufficient capital, slow-paying clients, and improper money management. Address by loophole that is holding up collection to get cash for repayment purposes.

Aim to Pay More than Just the Minimum – paying just the minimum required is ill-advised. Unless there is no other option, consider paying above the minimum each month to lessen your debt.

Avoid Credit Card Debts – this is the most practical advice this blog has probably given. To avoid the credit card trap, be sure to avoid additional debt if you know you can’t repay it on time.

Less Banks Issuing Credit Cards

Before, consumers with relatively good credit standing can expect to receive credit cards on their mail box. It has even become a nuisance for some. However, after years of doing this practice, financing companies are suddenly getting picky. Not only are they not giving out credit cards through mail anymore, they have also tightened their requirements by asking applicants for proof of their income (pay stubs, etc). And these consumers need to deal with high interest rates, more fees, and lower credit limit.

This reaction is really not surprising because banks typically tighten credit during an economic crisis. But what makes today’s development unique is that credit card companies also need to comply with the Credit Card Act of 2009. The new policy bans certain banking practices, limits fluctuating rates, and gives consumers earlier and more detailed information about their debt.

Though credit card companies have until February 2010 to implement all provisions stated in the law, a lot of them are now tightening things up before too many of the restrictions become legally effective. In addition certain provisions have earlier deadlines. For example, issuers now need to mail bills at least 21 days before the due date this August. In addition, they also need to allow at least 45 days notice before they implement any significant change regarding their terms of service.

Specific steps undertaken by credit card companies include:

-Credit standards are tightened – more applications are getting rejected. Those that get approved have smaller credit lines.

-Interest rates and fees are raised. From fixed rate, credit card companies are moving to variable rates.

-Rewards programs are enhanced for credit-worthy consumers but companies are asking for higher fees as well.

The industry is scrambling to find the new profitable segment. This is because without the flexibility to charge customers based on the risk they pose, the old calculations will no longer apply.

Credit Card Act of 2009 – The Effects

Last May 22, 2009, the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 was put into effect. Otherwise known as the Credit Card Act of 2009, this law was put into place to stop banks from taking advantage of consumers. It is basically designed to end the days of “unfair rate hikes and hidden fees.” Unfortunately, the actual effect of this law was not exactly what the President and Congress have hoped for.

Since it was signed into law, the big banks have thought of innovative ways to get around it. Major credit card insurers significantly revised their terms and conditions of use. Numerous consumers reported that instead of going down, some companies have even raised their fees, increased their interest rates, and restricted credit card benefits in anticipation of the Credit Card Act going into full effect.

For example, Chase has increased the minimum required payment to 5 percent from 2 percent. Meanwhile, other card companies have increased the balance transfer fees to 5 percent though it used to be offered for free in the past. In addition, credit card limits continue to go down while interest rates continue to climb. All these raise a crucial question – how did a law that was designed to protect the consumers have an opposite effect?

There are two issues in the provision we should look into:

Interest Rate Hikes – the new law significantly hinders the ability of card companies to increase their interest rates on outstanding balances. There are only three circumstances in which the balances can be increased: (1) when introductory rate ends, (2) minimum payment remains unpaid 60 days after the due date, (3) and when the underlying index that was used to determine the interest rate changes (variable rate).

Given this, it comes as no surprise that credit card companies would take advantage of the loophole extended to them in the system. Fixed rate credit cards are now becoming outdated as card issuers try to minimize their risk. Variable rates will insulate their portfolio from unnecessary risks while ensuring their continual profitability.

Balance Transfer – there are currently a lot of no-interest balance transfer offers in the market today. But the new law changed all that. Previously, when a consumer makes purchases at regular interest, his payments above the minimum are allotted to the no-interest balance transfer. As a result, consumers will actually pay interest on his purchases (those with regular interest) until the whole balance is paid.

From a policy point of view, the Credit Card Act is good because it requires excess payments to be allocated to the loan with highest interest rates. But consumers are actually paying a steep price for this now because the introductory 0 percent offer is no longer offered as widely as it once was. And the balance transfer fees have steeply gone up.

Credit Score Problems? We Have Some Suggestions

Credit problems are nothing new. But what makes it worse these days is the number of errors, inaccurate reporting, and systematic flaws in the credit scoring structure. Traditional scoring methods that were used decades ago are no longer reasonable in today’s environment because of the changes in the financial industry and the country’s macro-economic structure. As a result, many Americans are experiencing credit difficulties.

It is, for this reason, that credit repair has become a widely popular service in the country. Many might argue about the legitimacy of this service. After all, credit repair is not really as difficult as many credit repair companies make it look like. Even ordinary Americans can take specific measure to improve their credit. However, there are also people who champion the concept of credit repair services because it can potentially improve your credit drastically.

Banker @ Money Ning wrote a very informative post “Carry Debt to Improve Credit Score”. The specific techniques that were highlighted in this blog can be very helpful for individuals with moderate to bad credit. The blogger was confident enough to contradict some popular advice in the market. After all, even bankers can be wrong. Following his tips can get you on the road to financial recovery.

The blog Personal Finance Ezine uploaded an article titled “Never Pay Strangers to Raise Your FICO Credit Score”. Basically, it reasoned out that the legislation known as the “FACT Act” states that all Americans are entitled to one free copy of their personal credit report annually. The information available on this report includes your credit history (past and current debts), bankruptcy, and payment history among others. Proofing this report and calling the credit bureaus if there are any errors can give a significant improvement to your credit score.

Meanwhile, the site Get Student Loan Now has a blog entry “The Credit Repair Road to Success”. In essence, it highlights the three steps Americans need to go through in order to locate inaccurate information about their payment and credit history. It gives tips on how to get credit repair help. At the end, the article provides encouragement so that those who are deep in debt will not give up hope.