A credit card is a great financial tool. It can be more
convenient to use and carry than cash and it offers valuable
consumer protections under federal law.
At the same time, it's a big responsibility. If you don't use
it carefully, you may owe more than you can repay, damage your
credit rating, and create credit problems for yourself that can
be difficult to undo.
Chances are your mail is full of solicitations from credit card
issuers. How do you know if the time is right for a credit card?
Here's some important information that may help you determine
whether you're ready for plastic, what to look for when you
select a company to do business with, and how to use your
credit card responsibly.
Qualifying for a Credit Card
If you're at least 18 years old and have a regular source of
income, you're well on your way to qualifying for a card. But
despite the invitations from card issuers, you'll still have to
demonstrate that you're a good risk before they grant you
credit. The proof is in your credit record. If you've financed
a car loan or other purchase, you probably have a record at a
credit reporting bureau. This credit history shows how
responsible you've been in paying your bills and helps the
credit card issuer decide how much credit to extend.
Before you submit a credit application, get a copy of your
report to make sure it's accurate. It's available from the
three major credit bureaus:
EQUIFAX PO Box 105873, Atlanta, GA 30348; (800) 685-1111 (up to
$8 fee)
EXPERIAN (formerly TRW), PO Box 8030, Layton, UT 84041; (800)
392- 1122 (No charge)
TRANS UNION PO Box 390, Springfield, PA 19064; (216) 779-7200
(up to $8 fee)
Establishing A Credit History
Suppose you haven't financed a car loan, a computer, or some
other major purchase. How do you begin to establish credit?
First, consider applying for a credit card at a local store and
use it responsibly. Ask if they report to a credit bureau. If
they do - and if you pay your bills on time - you'll establish
a good credit history.
Second, consider a secured credit card. It requires that you
open and maintain a bank account or other asset account at a
financial institution as security for your line of credit. Your
credit line will be a percentage of your deposit, typically from
50 to 100 percent. Application and processing fees are not
uncommon for secured credit cards. In addition, secured credit
cards usually carry higher interest rates than traditional
non-secured cards.
Third, consider asking someone with an established credit
history - perhaps a relative - to co-sign the account if you
don't qualify for credit on your own. The co-signer promises to
pay your debts if you don't. You'll want to repay any debt
promptly so you can build a credit history and apply for credit
in the future on your own.
A positive credit history is an asset, not only when you apply
for a credit card, but also when you apply for a job or
insurance, or when you want to finance a car or home.
If Your Application is Denied
If you're turned down for a card, ask why. It may be that you
haven't been at your current address or job long enough. Or
that your income doesn't meet the issuer's criteria. Different
credit card companies have different standards. But if you are
turned down by several companies, it may indicate that you are
not ready for a credit card.
If you've been denied credit because of information supplied by
a credit bureau, federal law requires the creditor to give you
the name and address of the bureau that supplied the
information. If you contact that bureau within 30 days of
receiving the denial, you are entitled to a free copy of your
report. If your file contains accurate negative information,
only time and good credit habits will restore your
credit-worthiness. If you find an error in your report, you are
entitled to have it investigated by the credit bureau and
corrected at no charge.
Getting the Best Deal
Fees, charges, and benefits vary among credit card issuers.
When you're choosing a credit card, shop around. Compare these
important features:
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 % interest and a 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.
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. Some issuers charge
no annual fee.
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 you credit limit. Some may
charge a flat fee every month whether you use the card or not.
Customer Service. Many issuers have 24-hour toll-free telephone
numbers.
Other Benefits. Issuers may offer additional benefits, some
with a cost, such as: insurance, credit card protection,
discounts, rebates, and special merchandise offers.
Credi-Quette
Once you get a card, sign it immediately so no one else can use
it. Note that the accompanying papers have important
information, like customer service telephone numbers, in case
your card is lost or stolen.
File this information in a safe place.
Call the card issuer to activate the card. Many issuers require
this step to minimize fraud and to give you additional
information.
Keep your account information to yourself. Never give out your
credit card number or expiration date over the phone unless you
know who you're dealing with. A criminal can use this
information to steal money from you, or even assume your credit
identity.
Keep copies of sales slips and compare charges when your bill
arrives. Promptly report in writing any questionable charges to
the card issuer.
Don't lend your card to anyone, even to a friend. Your credit
privilege and history are too precious to risk.
You're Responsible
While a credit card makes it easy to buy something now and pay
for it later, you can lose track of how much you've spent by
the time the bill arrives if you're not careful. And if you
don't pay your bill in full, you'll probably have to pay
finance charges on the unpaid balance. What's more, if you
continue to charge while carrying an outstanding balance, your
debt can snowball. Before you know it, your minimum payment is
only covering the interest. If you start having trouble
repaying the debt, you could tarnish your credit report. And
that can have a sizable impact on your life. A negative report
can make it more difficult to finance a car or home, get
insurance, and even get a job.
Federal Protections. Federal law offers the following
protections when you use credit cards.
Errors on Your Bill.
You must notify the card issuer in writing within 60 days after
the first bill containing the error was mailed to you. In you
letter, include your name; account number; the type, date, and
amount of the error; and the reason why you believe the bill
contains an error. In return, the card issuer must investigate
the problem and either correct the error or explain to you why
the bill is correct. This must occur within two billing cycles
and not later than 90 days after the issuer receives your
billing error notice. You do not have to pay the amount in
question during the investigation.
Unauthorized Charges.
If your credit card is used without your authorization, you can
be held liable for up to $50 per card. If you report the loss of
a card before it is used, the card issuer cannot hold you
responsible for any unauthorized charges. If a thief uses your
card before you report it missing, the most you will owe for
unauthorized charges is $50. You should be prompt in reporting
the loss or theft of your card to limit your liability.
Kinds of Credit Accounts
Credit grantors generally use three types of accounts:
Revolving Agreement. A consumer pays in full each month or
chooses to make a partial payment based on the outstanding
balance. Department stores, gas and oil companies, and banks
typically issue credit cards based on a revolving credit plan.
Charge Agreement. A consumer promises to pay the full balance
each month, so the borrower does not have to pay interest
charges. Charge cards, not credit cards, and charge accounts
with local businesses often require repayment on this basis.
Installment Agreement. A consumer signs a contract to repay a
fixed amount of credit in equal payments over a specific period
of time. Automobiles, furniture, and major appliances often are
financed this way. Personal loans usually are paid back in
installments, too.
About The Author: Mark Daoust is the owner of New Credit Guide.
You can visit new credit guide by going to
http://www.newcreditguide.com
