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Showing posts with label credit cards. Show all posts

Saturday, October 17, 2009

Credit Scores: How They're Calculated and How They Affect Your Interest Rate

Your credit score is based on how you manage the credit you already have. Credit cards, car loans, mortgage loans, student loans, and utility bills all play a part in your credit score. If you miss payments, make late payments, or default on any of these, your score will fall. Conversely, if you always pay at least the minimum payment and always pay on time, your score will increase.

Maintaining a good credit score is incredibly important. If you have poor credit, it will be very difficult to get a good interest rate on a loan for, say, a house or a car when the time comes. It can even affect how much you pay for insurance.

Federal Trade Commission's article with more info on credit scores

Credit Reports
You are entitled to one free copy of your credit report from each of the three major consumer reporting companies (Equifax, Experian, and TransUnion) once a year. Anything above that, you will have to pay for (they charge up to $9.50). In order to receive your credit report, you must contact the agencies and request that they mail it to you. Do not contact each company separately; they've set up a website and toll-free number (1-877-322-8228) together, so that you can do all your requesting in one place.

Federal Trade Commission's article with more info on free credit reports

The consumer reporting companies are allowed to report most information about your credit for up to seven years, except for bankrupcy which can be reported for up to ten years.

Federal Trade Commission's article about how to recognize credit repair scams

If you find an error on your credit report, you can dispute it with the reporting company by contacting the credit reporting company (online, by fax, or by certified mail) and identifying the creditor you have a dispute with and the nature of the error. Include verifiable information, such as canceled checks or receipts, that support your complaint. The credit reporting company must investigate your complaint
within 30 days and get back to you with its results.

If for some reason, the error does not get resolved, contact the creditor with whom you have the dispute directly and try to correct the error that way. Once it's corrected, ask them to send notice of the correction to the credit reporting company.

If the error still remains unresolved, you have the right to explain in a statement that will go on your credit report. You also have the right to issue this sort of explanation even if the issue is not a reporting error, i.e. if you were actually at fault. For example, if you did not pay a car repair bill because the mechanic didn’t fix the problem, the unpaid bill may show up on your credit report, but so will your explanation.

See also: Credit Cards main, Choosing a Card: What to Look For, Establishing Credit

Choosing a Card: What to Look For

Finding the Best Deal on a Credit Card
There are tons of credit cards out there, and they all have different fees, interest rates, qualifications, restrictions, and benefits. You'll want to compare these to find the card that's right for you. Here are some factors to consider:

Annual percentage rate (APR): The APR is a measure of the cost of credit, expressed as a yearly interest rate. Check out the "periodic rate," too. That's the rate the issuer applies to your outstanding balance to figure the finance charge for each billing period. For example, if you have an outstanding balance of $2,000, with 18.5 percent interest and a low minimum monthly payment, it would take over 11 years to pay off the debt and cost you an additional $1,934 just for interest, which almost doubles the total cost of your original purchase. Watch out for low "introductory rates" that will later skyrocket, often after six months. Look instead for a low "fixed rate." But if you're using a credit card like you should, and paying it off completely every month, then you really don't have to worry about this.

Grace period: This is the time between the date of a purchase and the date interest starts being charged on that purchase. If your card has a standard grace period you have an opportunity to avoid finance charges by paying your current balance in full. Some issuers allow a grace period for new purchases even if you do not pay your balance in full every month. If there is no grace period, the issuer imposes a finance charge from the date you use your card or from the date each transaction is posted to your account.

Annual fees: Many credit card issuers charge an annual fee for granting you credit, typically $15 to $55. But there are plenty of cards with not annual fees. The only reason to get a card with a fee is if you absolutely cannot qualify for a fee-free one. And if that's the case, you probably shouldn't have one anyway. See Establishing Credit. If you do choose a card with a annual fee, it may be possible to get it waived if you pay all your bills on time. Call the customer service line and ask.

Transaction fees and other charges: Some issuers charge a fee if you use the card to get a cash advance, if you fail to make a payment on time, or if you exceed your credit limit. Some may charge a flat fee every month whether you use the card or not. Hint: avoid these like the plague. You shouldn't have to pay simply to have a credit card. See above.

Make note of all finance charges that could be applied--there will usually be a chart of them on the application or the terms of agreement. These include various transaction fees, service fees, late fees, and interest rates. Above all, stay away from costly cash advances--most of the time, they're a total ripoff.

Credit Limit: This is the total amount you're allowed to have charged on your account, (including purchases, cash advances, finance charges, and other fees) at any one time. The credit card company will set this limit depending on your credit history. If you're just starting out it will probably be fairly low, maybe even only $500 to $2,000. It will probably increase automatically as your credit score improves; if not, you can always call customer service and ask them to raise it. Try to stay well under your credit limit, so you'll have credit available if you need it in an emergency.

Customer service: This is actually really important, as crappy customer service from a credit card company can make your life miserable if say, you lose your card or get mischarged. Some companies are notoriously bad at giving a brother a break; others have great reviews in that department. Make sure, at the very least, that your company has a 24-hour, toll-free telephone number.

Other benefits: Lots of cards offer cool benefits like insurance (especially travel insurance), credit card protection, discounts, cash rebates, frequent flyer miles, and special merchandise offers. Make sure you look around and see what's out there.

Here are a couple of good places to start when looking for a card. They'll let you compare different types of cards from different credit companies and banks, and even search by different factors such as credit score required, rewards, annual fee, and APR.

CreditCardGuide.com

CreditCards.com

E-Wisdom's credit card page

Credit-Land.com

If you're a student, you can also try

StudentCredit.com

Federal Trade Commission's article with more info about prescreened offers of credit and insurance.

See also: Credit Cards main, Establishing Credit, Credit Scores

Establishing Credit

Image via Wikipedia

What Lenders Look For
Before creditors lend money, they need to be assured that the funds will be repaid. In other words, is the prospective borrower creditworthy? To find out, they ask for various types of information, which they obtain from your credit report, a computerized profile of your borrowing, charging, and repayment activities.

1. Income & Expenses

Lenders will look at what you earn and your regular expenses, such as rent, utilities, food, and other ongoing items. The amount left tells them whether you can afford to take on additional debt.

2. Assets

Do you have assets that can serve as collateral? Lenders will look for things like bank accounts, insurance, and valuable items such as a house, if you own one.

3. Credit History

How do you manage debt? If you have credit cards or have borrowed money before, you have a history that shows prospective lenders whether you are creditworthy by revealing details about the amount of debt you already have, how many credit cards you have, and whether you make payments on time.

It's easy to qualify for credit if you have a good credit history, but what if you have never used credit before? This is a common problem for people who just started working, those who work in the home, people who always pay in cash, and those who do not have assets or accounts in their own names. For them, the first step is to establish a credit history.

How to Establish a Credit History
Begin by opening an individual savings and checking account in your name. Over time, your deposits, withdrawals, and transfers will demonstrate that you can handle money responsibly.

Another easy way to establish credit is with utility bills. Having one or more utility bills in your name and paying them in full and on time will add to your credit score. Even cell phone bills work.

You could also apply for department store and gasoline credit cards, which generally are easier to obtain than major credit cards. Keep in mind that if you are repeatedly apply for cards and get denied, it will lower your credit score, so if you're denied more than twice, get a copy of your credit report and find out why before you apply for any other cards.

Once you get a credit card, an easy way to establish good credit is to just put a few purchases on it, and pay it in full at the end of the month. Do this for several months, et voila! You've established good credit.

See also: Credit Cards main, Choosing a Card: What to Look For, Credit Scores

Friday, October 16, 2009

Credit Card Basics

Credit Cards vs. Charge Cards
Many people use the terms credit card and charge card interchangeably, but there are important differences. In general, a credit card lets you make purchases for which you are billed later. Most credit card accounts allow you to carry a balance from one billing cycle to the next; however, you have to pay interest on that balance. Usually, you have to pay at least a certain amount of your balance each time you receive a bill.

A charge card is a specific kind of credit card. The balance on a charge card account is payable in full when the statement is received and cannot be rolled over from one billing to the next. Because you cannot carry a balance, a charge card doesn't have a periodic or annual percentage rate, so there is no rate for a charge card issuer to disclose.

When you apply for a credit or charge card, a card issuer must either disclose:

The annual percentage rate (APR) for purchases made on credit (credit cards only).
How the APR is determined (for variable rate APR credit cards only).
The method the issuer uses to compute the balance for purchases against which the finance charge is imposed. Calculating an average daily balance or using the outstanding balance at the beginning of the billing cycle are examples of these methods (credit cards only).
The amount of any minimum finance charge (credit cards only).
Any transaction fee for purchases, whether a specific dollar amount or percentage fee.
Transaction fees for cash advances and fees for paying late or exceeding the credit limit.
The amount of any type of annual fee that you will be charged.
When charges made to a charge card are due and payable.

Tips for Using Your Credit Card Wisely

To avoid late fees and finance charges, always make your payments on time. If you're mailing a check, send it at least a week in advance of the due date. If you're paying from a checking account online, make sure the transfer or bill pay's "deliver by" date is one or before the due date. If you miss the date and have to send your payment in late, it's often worth giving your credit card company a call and asking them to waive the fee if you've always made your payments on time in the past.
Charge only what you know you can pay at the end of each month. Keeping a balance is costly, even with a fairly low APR.
Use the online banking services associated with your card to keep track of purchases. Monitor it closely, and if you see an unfamiliar charge, call customer service immediately. If you've been incorrectly charged, you'll want to let them know ASAP so they can take the charge off your account.

Avoid having a delinquent account (what they call your account if you don't make at least the minimum payment on time) at all costs; these will severely lower your credit score and take forever to come off your record.

If you keep a balance on your credit card--Don't. Just don't. There's no way you're every going to get anywhere paying 18% interest. Pay it off as fast as you can, and don't even think about investing until you've got it paid off. There's no investment out there that's going to guarantee you higher than 18%, so you'll just be losing money anyway.
OK, so if you've already got a balance on your card, there are some things you can do to cut those crazy interest rates. Look for a new card that has an interest-free introductory period (sometimes up to a year!) and check into transferring your balance from your old card to the new one. (Don't forget to close the old credit card account!) This will buy you some time to save up money to pay off your debt. If you absolutely can't find a card with an interest-free introductory period, look for one with a lower interest rate. But be careful of balance transfer fees; many new cards will offer free balance transfers when you first open the account. Also, make sure you find out how long your new interest rate will last and how it may change.
Be especially aware of your card issuer’s billing practices, which can significantly affect your costs. How your card company treats the balances on which you are charged interest can be critical. Here are examples of potentially high-cost practices that many people don’t know about even though card issuers must disclose them:

Two-cycle billing: This billing practice is rare but is used by some card issuers. Practices may vary but, in general, if you pay your credit card bill in full one month but then only pay a portion of the bill the next month, your interest charges ultimately will be based on two months of card charges and not one. This may result in you paying more in interest charges than you would under the more common one-cycle billing method. To find out if your card is subject to two-cycle billing, review the cardholder agreement and disclosures from your lender or call their customer service number.
Payment allocation: This involves cards with multi-tiered interest rates. For example, there may be a low rate on a balance transferred from another card, a higher rate on new purchases, and an even higher rate on a cash advance. If you pay only part of your monthly bill, card companies typically will apply your payment to the balance with the lowest interest rate first, while the highest-rate balance continues to run up interest costs until you pay the entire balance.
Universal default: This happens when a card issuer increases a customer’s interest rate because he or she made late payments to other lenders or had an overall decline in a credit score—even if that customer paid the card bill in full and on time. While this once-common practice is rare, be aware that it could be used.

(#7 taken from "51 Ways to Save Hundred on Loans and Credit Cards," FDIC Consumer News, Summer 2007.)

See also: Choosing a Card: What to Look For, Credit Scores, Establishing Credit

Friday, March 6, 2009

Credit Cards and Credit Scores: Setting the Record Straight

Image via Wikipedia

My whole adult life I've only had one credit card, a Visa, (unless you count the department store card I got for the promotion and used once). But I've just recently acquired two other cards, a Mastercard and an Amex. A friend and I were discussing credit cards the other day because she was rather miffed that a shop she went to didn't take Visa, the only card she had. That's why I have one of each.

"But isn't having that many credit cards bad for your credit score?"

Actually, the number of credit cards you have doesn't really matter. What does matter is the ratio of your used credit (debt) to your available credit. The lower the ratio, the better; it looks good if you're not maxing out your whole credit line. Getting another card can actually raise your credit score because it increases your available credit, thereby reducing your debt-to-available-credit ratio.

This is certainly not to say you should go apply for five more cards. In fact, applying for more than one credit card (or loan or other type of credit) every six months can hurt your score, so if you must acquire multiple cards, space them out.

Of course, one of the dangers of having lots of credit is that some people have a tendency to use more of it than they should, i.e. buy things they don't need just because they can. Another danger is simply keeping them all straight. Unless all your cards have exactly the same terms (and they won't), you're going to have to be very careful which cards you use for what. For instance, say Card #1 has 0% APR on purchases and no annual fee for the first year (but you've only got 2 months left of that); Card #2 has no annual fee ever, 13% APR, and a good rewards program; and Card #3 has 18% APR on purchases, no annual fee for the first year (which just started), and no fee 0% balance transfers. You could use Card #2 for all your regular purchases (in order to get max rewards), put big purchases that you can't pay off right away on Card #1, and then in 2 months transfer the balance from Card #1 to Card #3.

Great, but you better remember:

to transfer the balance from Card #1 to Card #3 before it starts accruing interest
not to put any purchases you can't completely pay off each cycle on Card #2
not to put any purchases at all on Card #3*
to call Card company #1 when the first year is up (in 2 months) and either A) ask for the annual fee to be waived and don't put anything on it you can't completely pay off each cycle, OR, failing that, B) close the account**
not to transfer any balances to Cards #1 or #2
that you'll be able to pay off Card #1's balance that you transferred to Card #3 when Card #3's first year is up OR that you'll definitely be able to get another card with fee-free 0% BTs
to call Card company #3 when its first year is up and either A) ask for the annual fee to be waived and don't put anything on it you can't completely pay off each cycle, OR, failing that, B) close the account**
Remember to pay all your bills--even when you have 0% APR, you still have to pay the minimum balance each month

*When you make a payment on a credit card, it always applies first to the balance with the lowest APR. This means that if you made purchases on and transferred a balance to Card #3, you can't pay off your purchase and then go on to pay the minimum payment on the transfer. You'll be stuck running up interest on your purchase until you've paid off the transfer.

**Now you don't want to close any credit card account you don't have to--it lowers your credit score every time you close a card. (Note: That said, you're better off closing a newer one than an older one. Maintaining an account for a long time boosts your score--you don't want to lose that.)

You definitely have to be organized to juggle several active credit cards, but depending on your situation it might be worth it. For instance, I've got a student loan that's going to start accumulating 6.8% interest in June, so I'm putting it on a 0% APR card: my monthly payments will be smaller and I'll avoid accumulating interest. (Remember, though, you should only do this if you know you can either pay off the remaining balance at the end of the introductory period or have another no-interest card you can put it on. Otherwise, you'll be stuck paying a way higher interest rate than 6.8%.) I'll continue to use my lower-limit Visa (at 16%) for regular purchases, and the remaining card is basically for keeping my ratio stable; the only thing I'll use it for is booking travel since it comes with an unusually good travel insurance plan.

How many credit cards do you have and how do you keep them organized? What do you use your cards for?