1. Establishing credit using plastic: If you're just starting out with credit, don't apply for multiple cards at a time. Start small and ensure that you will be able to pay all your bills on time. If you get a pre-approved credit card offer in the mail, read the terms carefully before signing up. These credit offers can be very helpful in beginning a credit history, but only if they're through a reputable company.
Make sure that the creditor who issues your card is reporting your activity to the credit bureaus
When reading the terms of a credit card application, make sure you understand the grace period. It's important to get your payments in well before the due date to prevent having to pay late fees and damaging your credit. If you're planning on sending your payments by mail, remember that the credit card issuer will determine whether or not a payment is on time by the date they receive the payment, not the date it was in your mailbox.
If you are having trouble finding a credit card company that will accept your application, consider applying for a secured credit card. These cards lower the risk taken on by the credit issuer and can help you get your foot in the door.
Lastly, make sure that the creditor who issues your card is reporting your activity to the credit bureaus. Without their input, your efforts to establish credit will be for naught.
2. Closing credit cards:
If you have a good credit history with a card, and you want to quit using it because of its high interest rate or because you simply want to lower the number of credit cards you use, consider cutting up the card but not closing your account. Because the credit industry looks at your utilization ratio, closing your credit card account could damage your credit score. Your utilization ratio consists of the amount of money you put on your credit cards in an average month divided by the total credit you have at your disposal. While your spending habits may stay the same after you close your credit account, your utilization ratio will go up, which could bring your FICO score down. A utilization ration below 50 percent is ideal.
3. Cash advances:
Because cash advances are so easy and convenient to obtain, consumers tend to think of the money the ATM spits out as their own. In reality, cash advances come with exorbitant interest rates and fees. The Annual Percent Rate (APR) you will pay for cash advances (and balance transfers) will most likely be quite a bit higher than the APR you pay for regular purchases. While you don't have to start paying interest on your balance for regular purchases until the payment due date, there is normally no grace period applied to cash advances. The second you take out a cash advance at an ATM, interest starts to accumulate. If you don't know what rate and fees you will be charged for taking out a cash advance, you may need to look at the original solicitation form you were given or call your creditor directly, as this information is often not printed on monthly statements. Also, if you must take out a cash advance, consider doing so inside the bank or institution instead of at its ATM, as most institutions charge fees for using their ATMs.
4. Balance transfers.
It makes sense to use balance transfers to lower the amount you pay in interest each month. But, as with any other financial decision, it's smart to shop around and investigate different cards and companies before applying for a new credit card. Keep in mind that applying for too many credit cards can reflect negatively on your credit report.
Consumers should ask the following questions before applying for a new card or using an existing credit card to transfer a balance.
- Does the balance transfer interest rate apply to the balance transfer only, or does the advertised rate also apply to the purchases I make as well?
- After the introductory rate is over, what rate will I be charged?
- How long does the introductory rate last?
- Does the new credit card have an annual fee? If so, how much is it?
- How much are the late fees and over-limit fees?
- Are there balance transfer fees? If so, how much are they?
- If the fee is waived for the initial balance transfer, will subsequent transfer fees be waived as well, or will the additional transfers be treated as cash advances?
When you accept an offer, be certain that you qualify for a decent interest rate after the original offer expires. You don't want to be stuck with a 21 percent rate at the end of the introductory period.
Before deciding to transfer a balance to a new card, check to make sure your old card won't levy a fee for transferring your balance. If they will, you need to weigh what you will save against what you will pay in fees in order to determine if making the transfer will end up saving you money in the end.
Be aware that many credit card companies will direct your payments to the low interest balance transfer loans before the higher interest purchase charges. They do this because the low interest transferred balances are more costly for them to carry.
If you do open a new account and transfer the balance of an old card to the new one, be sure to keep your old account open until the transfer goes through. Even after you are informed that the transfer is complete, you should double-check with both cards to make sure that everything has gone through appropriately. If you decide to leave a balance on your old card, call that card's customer service line to see if you can negotiate a better interest rate, letting them know that you will transfer the remaining balance in the near future if they don't lower your rate. Wait until at least six months have passed before you apply for another balance transfer. Too much activity too close together may show up negatively on your credit report.
Balance transfers can also be used for installment payments on cars and appliances. You can use the convenience checks sent by your credit card issuer for this purpose. As with all other balance transfer situations, be sure to read the terms before you act.
5. Credit protection:
The new "credit protection" service being offered by institutions should not be mistaken for an insurance policy. It is, rather, a program that suspends your credit card minimum payments and interest charges for a specific length of time should you fall seriously ill or become temporarily disabled. It does not erase your credit card debt or pay it off. Once you get back on your feet, you'll once more be responsible for making your payments. The benefit of the program is that, during the period that you are unable to make your payments, your credit issuer will not report any late payments to the credit bureaus.
If you decide you want credit protection, contact your credit issuer to find out how much you will be charged monthly for the service and what they qualify as "seriously ill" or "temporarily disabled." You may find it best to save the money you would otherwise spend for credit protection in a high yielding savings account.
6. Paying off loans and credit cards one at a time:
You've researched all your loans and credit card debt and determined which ones are the biggest, which ones are the smallest, and which ones have the highest interest rates. Using your budget, make the minimum payment on every credit card debt plus more than the minimum on one of the cards, it's usually smartest to pay off the one with the highest interest rate first. When that debt is paid off, you can focus on the next debt in line. Pay off those with the highest interest rates first, the smallest debts next, and tackle the biggest debts last when you can concentrate on them fully.
7. Your credit rights:
The information listed on your credit report doesn't just affect the number of credit cards you can carry. It can also play a part in where you live, who will hire you and what you're required to pay in order to receive household services such as telephone, gas and electricity. Even more unnerving, the information that finds its way into your credit file can sometimes be misleading or incorrect, and can sometimes even belong to someone else.
Fortunately, a number of new laws have been created to protect our rights as credit consumers. By becoming familiar with these rights and using them, we can take control of our own financial futures.
The Fair Credit Reporting Act (FCRA) promotes the accuracy and privacy of information in the files of the nation's consumer reporting companies. Under the FCRA, you have the right to receive a copy of your credit report
, which must contain all the information in your file at the time of your request. All three major credit bureaus are required to provide you with a free annual copy of your credit report. You're also entitled to a free report 60 days after being denied credit, insurance or employment if that decision was based in part on the information contained in your report. You also qualify for a free credit report if you're unemployed and plan to look for a job within 60 days, if you're on welfare or if you suspect you've been a victim of identity theft.
Find out more at www.annualcreditreport.com
. It's important to note that FICO scores or any other type of scoring won't be included with your free credit reports.
You have the right to question the accuracy or completeness of the information on your credit report by sending written notification to the credit bureau. They are required to investigate your claim and report their findings within 30 days. If your creditors cannot verify the information in question, the credit bureaus must remove the information from your report. While an item is being disputed, a creditor cannot report a consumer's account delinquent. However, the consumer must notify the creditor in writing within 60 days of receiving the questionable bill under dispute.
If you would rather the credit bureaus not give your name out to creditors and insurers who wish to make unsolicited offers of credit or services, you can call 888-5-OPT-OUT or write to each bureau individually. Calls will be honored for two years while written requests will be honored permanently.
According to the Equal Credit Opportunity Act (ECOA), creditors are not allowed to turn you down on the basis of your race, sex, marital status, religion, national origin or age. It is also illegal to discriminate against those who are recipients of public assistance. Although you may be asked for some of this information for statistical purposes, it cannot be used as a deciding factor for granting you credit. If you are denied credit, you have the right to know why.
Anytime you sign a credit contract, you agree to make payments at certain intervals. If you fall behind on your payments or an error is made that makes your credit issuer believe you have defaulted on your payments, your creditor may begin using aggressive tactics to collect the debt you owe. The Fair Debt Collection Practices Act (FDCPA) was created to protect consumers from unfair, deceptive or abusive methods of debt collection. You have the right to be free of debt collection phone calls between 8AM and 9PM, or at any time at your place of employment, if you tell the debt collectors your employer disapproves. Debt collectors must also identify themselves and give honest information without using harassment, oppression or abuse. By law, if you request in writing that debt collectors stop contacting you, they must comply. If debt collectors don't comply with these practices, you have the right to sue for punitive damages.
8. College students and teens with credit cards:
The 2006 Interprise, Poll on Teens and Personal Finance conducted by JA Worldwide (Junior Achievement) and The Allstate Foundation, found more than 10 percent of respondents indicated that they own credit cards. This rise in credit card use has been attributed to a number of things. Some have speculated that because of rising tuition costs, students are now using credit cards for their extra spending needs. Some have found that teens and students are seeing their peers using credit cards more and more often and, because they want to fit in, want to do the same. Some parents are choosing to add their children onto their existing credit cards as a way to help their children develop good credit histories. Other parents find that giving their teenagers and college-aged children low-balance cards is easier than supplying them with cash when they need it.
While these are legitimate reasons, it's important to set a good financial example and teach your children good credit habits so that they don't find themselves in trouble later. Before you ever give one of your kids a credit card, teach them about interest, the importance of paying on time, and the principles of saving money. Be sure that your children understand the connection between working and money. It's important to teach the difference between needs and wants and monitor your child's spending habits to make sure an addiction does not develop. You can hold regular financial sessions with your child where you review, discuss and plan financial goals and budgets. Permitting teens and students to make a few minor poor financial decisions occasionally can be a necessary part of the learning process. Consider starting your child with a debit card, and then moving on later to a pre-paid, or secured, credit card. Teach your child how to read and understand his/her monthly credit card statement. Good financial habits will benefit your child far into his/her financial future. You'll find that your example and active participation will prove invaluable to your teen or college-aged child.
9. Rising interest rates:
Credit card interest is based on the Prime Rate set by the Federal Reserve. Since it continues to inch its way up, refinancing your home mortgage is no longer the automatic answer to credit debt it once was. If you have an accumulated savings of some type, consider using it. Your other recourse is to take advantage of a 0 percent interest offer and pay your debt down as soon as you can. Read about paying attention to the fine print on these offers in #10 below and #3 above.
10. Fine print:
There's nothing fine about fine print. The U.S. Government Accountability Office reported that the fine print on some credit card agreements read at a 27th grade level. As many Americans read at an 8th grade level, it's no wonder credit card indebtedness is escalating.
What are some of the traps hidden in high-flown credit-type language?
- On some cards, one late payment can raise an introductory rate of 1.9 percent to a 35 percent default rate.
- A hefty fee normally awaits those who go over their contracted limit.
- Spending over your limit can also cause your interest rate to skyrocket.
- Late fees have increased in recent years from $5 to $10 to an average of $30.81.
- You may also be charged a fee for making a payment over the telephone.
- It remains important, even for those who pay online, to make their payments early. Some companies insist that it takes 48 hours or more to process your payment, which (if you're not careful) can earn them additional interest and possible late payment fees.