Create Credit-Wise Clients

Here are nine tips to help clients manage their credit before it manages them.

By Janet Arrowood

It is the beginning of the year and, once again, offers for credit are everywhere. The temptation to accept these offers is high—especially for clients who overindulged during the holidays and may be in a financial bind. The result: clients that are in financial trouble, or even dire straits.

Your challenge is to keep your clients from getting into credit-based trouble in the first place. How can you do this? A good relationship, regular conversations and a working financial plan can go a long way. In addition, here are nine ideas to use with your clients.

1. Avoid 100 percent to 125 percent mortgages, or mortgage-equity line combos that fall in that range. Even better, avoid loans and credit lines against a residence that (in total) exceed 90 percent of the home’s sale value; 80 percent is a better maximum.

2. Avoid making only minimum payments on a credit card or equity line of credit. If no additional debt is added to an existing credit card balance, and your client begins making minimum payments, it is going to take about 10 years to pay off the current debt. That makes for a very expensive pizza or new sweater!

3. Once in a while, it can make sense to consolidate high-interest-rate credit card debt into a new, lower rate card, but make sure that low rate is not a short-term “teaser” and applies to all new purchases, not just balance transfers.

4. A home-equity line of credit can be an excellent way to consolidate the debt on high-interest-rate credit cards. But this only holds if the new debt is managed, and your client’s goal is to reduce the existing debt load, not increase it, as his payments are “more manageable.” Too often people get home-equity lines of credit (or consolidate debt on new credit cards) and then proceed to build even greater debt than before.

5. Every time your clients get a new credit card, they need to get rid of an older, high-interest-rate one.

6. Remind clients that the interest on expenditures against a home-equity line of credit is not automatically deductible. Some things may not qualify, such as a vacation or a child’s college expenses. Always let your clients’ tax professional make the deductibility determination.

7. Have a plan for paying down debt in order of (a) highest interest rate and (b) nondeductibility of interest. That means if your client is carrying a heavy load of credit card or other nondeductible debt, he should pay that off before putting extra money towards the principal on a home. That also means paying off car loans and credit cards before paying off deductible portions of a home-equity line of credit.

8. Challenge your clients to put their credit cards in the freezer for 60 days and see how much less money they spend. Credit cards include ATM cards, check cards and any “convenience” checks associated with credit cards and credit lines. They will be amazed how much less money they spend: fewer meals out, fewer impulse purchases, and so on.

9. Encourage your clients to get their credit reports from the three main bureaus (www.experian.com, www.transunion.com and www.equifax.com) and review them with someone (a banker, perhaps) who can show them the areas that are hurting their credit scores. Many times there are cards that have been destroyed years ago, but your client never told the credit card company to drop the card.

Make a review of all your clients’ sources of credit—loans, cards, equity lines and so forth—a part of the annual review, and you and your client will be amazed how much wasted money you can find.

Janet Arrowood is the managing director of The Write Source Inc. She can be reached at TheWriteSource@earthlink.net.