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House vs. debt: Know the traps

Ted Griffith
(Wilmington, Del.) News Journal
March 20, 2005 - Jim Hamilton made a late-year resolution to get rid of his credit-card debt. In December, when he refinanced his mortgage through ACA Mortgage in Wilmington, Del., Hamilton borrowed an additional $15,000 to pay off debt he was carrying on five credit cards. He'd accumulated the debt spending on everything from furniture for his home to Christmas presents.

Hamilton, 63, of Elkton, Md., estimates that the move cut his monthly debt payments by $500 a month. Rates on his cards ranged from 12 percent to 20 percent, while his mortgage is fixed at 7 percent. He'll also be able to deduct the interest he pays on his mortgage on his tax returns. advertisement

"I really see it as a win-win situation," he said. "I got a good rate and a tax write-off."

Hamilton is among thousands of people nationwide who, during the past several years, have replaced high-interest credit-card debt with relatively low-interest mortgage or home-equity borrowing.

"By taking this approach, you can free up what could be several hundred dollars a month," said Keith Gumbinger, vice president with HSH Associates, a Pompton Plains, N.J.-based provider of mortgage data. "Your interest rates can be cut in half and monthly cash flow really improved."

Some consumer advocates aren't pleased. A recent study released by New York-based advocacy group Demos said that the wave of borrowing is eroding the ownership stakes, or equity, of homeowners. Americans own less of their homes today than they did in the 1970s or 1980s, according to Demos, which estimated that the average American homeowner's equity has fallen from 68.3 percent in 1973 to 55 percent in 2004.

Ed Mierzwinski of the Washington-based Public Interest Research Group said that he recommends against paying off credit cards with a mortgage or home-equity loan.

He said consumers must recognize that they are pledging their homes as collateral when they take out a mortgage or home-equity loan, a key difference from credit-card debt, which is not collateralized.

"I don't think it's a good idea to trade unsecured debt for debt that's secured by your house," Mierzwinski said.

Clare Crossan, president of ACA Mortgage in Wilmington, said that she doesn't anticipate a slowdown in the use of borrowing against homes to pare credit-card debt.

"Mortgage rates remain very attractive," she said. "I'm not saying rates are at historical lows, but I would say rates are still unbelievably low."

Gerri Detweiler is a Sarasota, Fla.-based personal finance commentator and author of The Ultimate Credit Handbook. She said she recommends consumers proceed with caution when replacing card debt with home debt. If you fall behind on your credit-card payments, your credit rating will suffer and you'll rack up hefty penalty charges. These are serious problems, to be sure, but not as devastating as losing your home, which could happen if you don't pay your mortgage or home-equity loan, she said.

Still, Detweiler said, the strategy can make sense for certain consumers. She said that if consumers are absolutely confident about their ability to pay off the debt, borrowing against the home can make sense, given the difference in interest rates.

To be successful, consumers have to resolve to cut back on their use of credit cards, once they've used a home loan to shed their card balances, Detweiler said.

"If you go back and run up the card debt, you'll be in a worse position than when you started," she said.

Getting ready to sell on credit

3/17/2005 - The main goal of any commercial undertaking is to make profit. More profit can only be realised through growth and expansion which result in increased sales. As your business grows, your customer base increases and you will be prompted to consider offering credit to your customers in the same way you buy from your suppliers. Selling on credit is risky but if properly done, it will help you realise more sales.

You can offer consumer credit, if you sell directly to the consumer. In the same way if you sell to industrial customers you can as well extend a line of credit to your corporate customers and this will be the main focus of this discussion.

Why offer credit?
The first issue you should address is whether or not selling on credit is even necessary for your particular business. There are some businesses where it is nearly unavoidable.
Credit is a promise to pay later and is regarded as a means of assisting with the purchasing power of the market.

It is therefore very important to determine if it is feasible for you to start offering credit at all. It requires discipline in the form of taking credit applications, setting policies for your credit standards, reviewing the applications and re-checking them periodically.
If your business is relatively young, you way want to wait until you feel a bit more in control of things.

However, if you have decided that you are ready to offer credit to your customers, here are some steps that you need to consider.
Establish a formal credit application and qualifying system
A lot of small businesses deal verbally even with credit transactions and it is advisable to stop doing business with words and put things in writing.

Your customer will have to provide you in writing their request for credit. Design an application such that you have all the information that you need to lower the risks. Accepting applications over the phone is usually not advisable. Face to face encounters will allow you to get a signed application form and give you an opportunity to explain more about your business and your credit policies.

Establish a formal credit policy
You have to determine a number of credit related policies. This includes the way you expect to be paid, any discounts for prompt payment, any interest or penalties for late payment. Terms do not have to be the same for all customers.

It is not unusual to see some customers enjoying terms of 30 days while others have more lenient terms like 60 or 90 days.
Once you approve credit, make sure that the terms are included on the invoice. By the way it is usually not a good idea to let your customer know that there are other customers with more lenient terms.

As a small business owner, it is very common to find your self with some large customers who will want to set their own terms.

Having a collection policy
In general, it is a bad idea to let accounts go over 120 days old. You must have a policy of ageing your accounts on a regular basis and collect those that exceed the pre-established limit. However, make certain that you know both your rights and the customers' in terms of debt collection otherwise if you get unprofessional you may poison the relationship between your customer and yourself.