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April 28, 1997

CREDIT-CARD SAFETY TIPS

"How did I get started? I just put it all on credit cards." You've read the quote before, perhaps spoken by some under-30 moviemaker who just landed a fat production deal. Of course, you only hear about the success stories. Using credit cards to finance any big project -- much less a movie -- is not the soundest capital decision. But sometimes it's the only option. And sometimes it works. How can you prudently use credit cards to help start or save a cash-starved company? Business Week Online spoke to a dozen credit experts, who offer the following tips:

Better shop around. Nearly all the experts agree that rate-hunting (moving a balance to the cheapest rate available) can be a boon to cost-conscious small business. "If you can have enough discipline to find a better rate, it's probably advantageous," counsels Alex Rydel, a vice-president at the non-profit Consumer Credit Counseling Service, a national organization. But don't expect introductory offers to last forever, says Durant Abernethy of the CCCS. "Credit grantors are looking at ways to keep their profits high, and stopping the introductory rates may be a way to do that in the near future." For one year, it costs nearly $900 dollars more to finance $10,000 at 14% vs. 5.9%. To find the best rates, use the Web links in Business Week Online's Banking Center area (http://www.businessweek.com/banx.htm) or order CardTrak, a monthly rate newsletter. It's available for $5 at 800 344-7714.

Don't quit your day job. If you're goal is to accumulate as much credit as possible (a highly risky proposition, at that) don't just quit your job, load up on credit cards, and proclaim your "entrepreneurhood." If you want to maximize your credit line, apply for cards while you're still employed. Better yet, "if you've got a day job, keep it," says Irene Wells, a credit counselor in San Diego. That will help you hold debts down while still qualifying for more borrowing power.

Beware of affinity cards. Affinity credit cards -- for instance, cards linked to frequent-flier miles, universities, or pro sports teams -- lure customers with perks but have annual interest rates on past balances as high as 18% to 21%, notes Lawrence Gardner, a financial consultant in Troy, Mich.

Don't mix business and pleasure. Once you start with credit card-financing, keep your business expenses separate from your personal ones. Even if you have only personal cards, use one strictly for business and another strictly for yourself. This serves two purposes: First, you'll be able to accurately account your business expenses. Second, you'll have organized records for the IRS. That's important if you plan to take business deductions on your income taxes.

Organize and itemize. Treat cash advances like any other sum deposited in your checking account. Subtract expenses paid for with that money, so you know exactly where it went, advises Rydel. "That money so often gets lost," Rydel adds.

Check your credit report often. If you're borrowing a lot on credit cards and are frequently consolidating balances, stay current on how other borrowers perceive you. The more credit activity you have, the more likely you are to have a reporting mistake. Reports are generally $8 apiece at the three main credit-reporting agencies: Experian (formerly TRW): 800 682-7654, Trans Union: 800 226-6214, and Equifax: 800 685-1111.

Know the risks. Above all, says Wells, keep your credit-card use and borrowing to a minimum. Budget your payments, and have a target date for making the last one. "It's so easy to fall into a trap of owing thousands of dollars in interest, she adds. "Be aware of everything that you are risking."

The best reason to charge it. OK, then, when should you load up on credit-card debt, even if it comes at a high interest rate? For making tax payments, says Lawrence Gardner. If you pay late, the government can sting you twice: Not only will it charge high interest rates but it might also levy penalties of up to 100% on your missed payments. Bob Litwin, a credit adviser in Houston, Tex., agrees: "It's a lesser of two evils, but I rather be a slave to credit-card companies than to the IRS."

Communicate. If you're using credit cards to stave off bankruptcy, or if the card accounts themselves have fallen into collectors' hands, keep in touch with your creditors. "Eighty percent of the time, people want to avoid talking to their creditors, and that's one of the worst things that can happen," says Anne Haines Yatskowitz, executive director of Accion New Mexico, a nonprofit lending group. She recommends constant contact with creditors, and in instances where entrepreneurs foresee a bad month, a preemptive phone call. "That lets the creditor know that someone is giving thought to the situation and is devising a viable plan of action," she says.

One more thing. Counsels Kent Snyder of the American Bankruptcy Institute: If you or your business eventually lands in bankruptcy, a judge will want to know if you took on new debt while you were aware that your business was collapsing. If so, there is a chance that you won't be absolved of those debts -- and you could even be charged with criminal fraud, too. Borrow wisely.

By Dennis Berman in New York


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