Using Your Credit Can be a Good Thing

Your credit score does not correlate directly to your financial well-being. You could have a bad credit score and actually be very financially stable. Conversely, you could have a good credit score and still struggle with your finances. Because credit reporting agencies cover such a wide array of people, credit reports do not always give the best portrayal of reality. Because of this, it is important to understand how credit works so that it can benefit you as much as possible.

Your credit score is based off of several factors, including:

• If you make payments on time.
• The amount of credit you have available to you.
• How much of your available credit is currently being used.
• How much of your available credit you have used in the past.
• How many lines of credit you have open.
• How long those lines of credit have been open.
• How many times you have failed to live up to your financial obligations in the past.

Because your credit score is based upon these factors, it would be detrimental to completely neglect your credit by purchasing things solely with cash.

How to Make Credit Work for You

Since we know that credit isn’t something that we can simply ignore, you can make credit work for you by following a few simple principles:

• Never buy things you cannot afford.
• It is safe to purchase things with a credit card, however make sure that you have the money to pay off the balance of the credit card each month.
• Do not close out old bank accounts and lines of credit. If you have things paid off, that is great, just leave the account there with a 0 balance. Credit reporting agencies look at how long your accounts have been active.
• Get a credit card that offers you benefits. Benefits may include cash back, frequent flier miles, discounts, and protection on the purchases you make.
• Never sign up for a credit card with an annual fee. There are enough free options out there that you shouldn’t ever need to pay an annual fee.
• Make sure that your checking account has overdraft protection.

Don’t Let it Get Worse

If you find that you do struggle with controlling your spending when you have a credit card or other sources of credit, by all means do not use credit to make purchases. Abusing your credit will always catch up to you. In addition, you will always pay more back to the credit card companies than you were able to purchase. However, the ideal situation is when you discover that credit is your friend and that you can use it to help you.

1. Be Informed – review the rates and balances on your other credit cards. Is this new limit or rate increase out of line with what other companies are offering? If so, you may have a stronger case when it’s time to negotiate. If you don’t have any other cards, do some research to find out the going interest rates for credit cards that are similar to the one you already have. What you shouldn’t do is apply for several new credit cards at once, as this will lower your scores.

2. Don’t Delay – contact the credit card company as soon as you find out that your rate or credit limit is being changed. Because of the new consumer protection laws, you should have 45 days to review these new terms. You’ll have more time to negotiate a more favorable outcome if you work with the credit card company from the beginning.

3. Speak with Management – in general, customer service representatives may not have the ability to alter the new terms on your card. Ask to speak with a manager, and then politely make your case. If you have been a good customer, and are otherwise creditworthy, speaking with a manager may be the only step you need to take.

4. Ask for a Compromise – you may be able to get your credit card company to reinstate your prior interest rate, or your prior credit limit but not both. Decide which one is most important to you and your current credit score. For instance, a low interest rate may be better for you if you have a large balance to pay off whereas a higher credit limit may be what you’re after if you carry a low balance and want to improve your available credit ratios.

5. Inquire about Other Options – sometimes credit card companies may be willing to offer your old rate on a different card that has fewer rewards or perks. If you are willing to switch, be sure to ask if this is an option. You may also be able to negotiate a more favorable rate if you are willing to open a secured credit card. However, if you open a new account to transfer the balance, be aware that your past credit history on the prior account will not be carried over to the new one.

You always have the option to cancel the card and pay off the balance underneath the old credit terms, a move which most credit card companies will want to avoid if you’ve been a good customer. Negotiating a more favorable rate can help you to keep your payments manageable while the account remains open to give your scores a boost. However, if the new rates are going to make it impossible for you to afford the payments, the best advice is to close the account. Missed payments will harm your credit far worse than a single closed account.

If you want to help your teenager build a solid credit history and high credit scores, it’s important to establish responsible spending habits from the start. A joint credit card account can help your teen learn to manage debt responsibly, while taking advantage of your credit history to provide lower rates and better terms.  However, opening a joint account with your teen has an impact on your credit scores as well. The new line of credit, as well as your teen’s spending habits will be reflected on your credit report.  Here are a few tips to make sure that your teen’s new credit card doesn’t spell disaster for your credit scores:

1. Set up-front expectations. Owning a credit card is a big responsibility. Make certain your teenager knows when it’s ok to make a purchase, and what types of purchases are acceptable. Agree upon a set spending limit per month – ideally no more than 10-20% of the total credit limit.

2. Enforce limits. Once you’ve set up purchasing limits, make certain that your teen sticks to those limits by reviewing purchase history and balance information regularly. If you find that your teen is regularly spending more than the agreed-upon amount, you may need to place tighter controls on the use of the card.

3. Use automatic payments. Don’t give your teen the chance to miss a payment. Set up automatic payments that debit directly from his or her checking account, and follow up to be sure that payments are received on time. One missed payment can lower your credit rating as well as your child’s, so it’s important to stay on top of payments from the very beginning.

4. Set up alerts. Many credit cards have an option for email alerts if the balance on the card goes over a certain amount. If your son or daughter is in college far away, these alerts can help you to keep track of your child’s spending before it gets out of hand.

5. Review spending habits. Go over the monthly statements with your teenager for accuracy, and to be certain that your teen is using the card responsibly. Teach your teenager to compare the charges on the statement with receipts and records for the month to minimize the chance for fraudulent charges.

By taking the time to educate your teenager about responsible credit-use, you can ensure that his or her credit scores are well-established along with solid financial habits. This will be especially helpful when it’s time to establish credit in his or her own name, and will give you peace of mind when it comes to your teen’s fiscal responsibility.

1. A limit on fees. Under the new laws, credit card companies can’t charge more than 50% of your credit limit in fees for a new card, even if your credit is less than perfect. Additionally, they can only collect up to 25% of your credit limit in fees up front. The rest must be spread out over several months. You also can’t be hit with “convenience” fees when you pay by phone or online, provided that you are paying well before the due date.

2. No over-limit fees (without opt-in). No longer will credit card companies be able to charge you an over-limit fee on a case-by-case basis. You have to opt-in to the fees, otherwise, your card will simply be declined, and no fees will be incurred. Staying away from over-limit fees is a good way to avoid a hit to your credit scores as well.

3. No multiple over-limit fees for a single transaction. If you do opt-in to the fees, the credit card companies will only be able to charge you once. For example, if you go over your limit one month, but make no new purchases the next month, they cannot charge you a second over-limit fee, even if your balance remains higher than your credit limit.

4. 45-day notice required for changes in terms. If a credit card company decides to change any terms of the card, they must provide 45 days’ notice. You have the right to opt out of the changes, and pay down your balance, but in many cases, if you don’t accept the changes, the account will be closed.

5. Consistent due-dates. Due dates for your credit card bill must be consistent from month to month. This helps to eliminate the potential damage to your credit scores due to fluctuating payment dates.

Even with these changes, getting new credit may not be simple. In some instances, you may want to opt for a secured credit card in order to guarantee the best rates possible. If you’re having trouble deciding what kind of credit card would be best for you, it’s important to do the research first. Applying for several different credit cards at once will harm your scores, so narrow down your choices and only pick one or two applications so send in. The new credit card laws can help you to improve your credit scores, but only if you use your credit wisely.

Under the new credit card regulations, companies are forbidden to change interest rates on pre-existing balances for fixed-rate credit cards. However, many credit card companies are switching to variable rate cards for most of their customers. This means that as the prime interest rate rises, so will the amount of interest you pay on your credit cards. This ultimately leads to higher balances which are harder to pay off, and in turn can damage your credit score by causing you to utilize more of your available credit limit than you normally would.

If your credit card company switches you from a fixed-rate credit card to one with a variable interest rate, you can reject the change. However, in most cases this means that your credit card will be canceled at the end of the current agreement cycle. When this happens, if you’re still carrying a balance on the credit card your credit scores will drop due to the fact that your credit report will show a balance higher than your available limit on that card.

When dealing with a credit card that has been switched to a variable interest rate, it’s generally in your best interest to continue making payments until you have paid the balance of that credit card entirely. Then, if you decide to cancel the card you can do so without having as much of a negative effect on your credit report. Currently, because interest rates are generally low, you may even be able to save money versus your fixed interest rate, assuming you can pay the card off in only a few months.

Another option which may help you to keep your credit scores healthy is to pay off the variable rate card, and then use it for purchases that you can pay in full each month. This will help to prevent any reduction in your credit limits, as well as avoid ‘inactivity’ penalties that some banks have begun to assess. If you have credit cards that you haven’t used in several months, now is the time to do so. Make a small charge to keep the account active, and pay it off as soon as possible. Otherwise, you run the risk of owing fees due to inactivity, which can pile up and cause late payments and higher interest rates overall.

Regardless of whether you decide to keep the account or close it, the important thing to remember is to keep the account open until the entire balance is paid off. In this way, you’ll avoid a major hit to your credit scores, which will save you money on any new credit that you apply for.

Last Minute Interest Rate Hikes – Many credit card companies sent out notifications detailing higher interest rates and other terms in advance of the new credit card laws. Some of these notifications may be confusing to consumers, due to the fact that the listed changes may not take effect for several months. Here’s the bottom line: if you received a notice of a change to your credit card’s terms before August 20th, you only have 15 days to opt out, even if the proposed changes don’t take effect until months later. Don’t wait to take action, and be sure to read the fine print in order to avoid having your account closed, or assessed additional fees.

Changes to Minimum Payments – Some credit card companies are also raising the amount you have to pay each month if you carry a balance – up to 5% from the typical 2-2.5% seen in years past. While you can’t always opt out of these changes, in some cases you may have the option to write in and retain your old rates. Be careful with this option, however, as some companies will close your account if you opt out of their new terms.

Increased Penalties for Late-fees and Over-limit Fees – While these types of penalties are easy to avoid if you pay your bills on time and stay within budget, credit card companies are also reducing consumers’ credit limits without providing any notice. Because the credit card companies aren’t required to inform you about changes to your credit limit, you could rack up over-the-limit fees without realizing it until your statement arrives in the mail. Your best defense against this is to sign up for alerts that will let you know when you are approaching your limit, coupled with regular vigilance through online access or customer service, so that you always know your limit before you go shopping.

Another way to avoid paying extra: Opt out of over-limit purchasing altogether.  Companies are now required to allow you to do this, but you will have your credit card declined for any purchase if that purchase would take you over the limit. If you typically keep your balances low, but aren’t sure about your credit limit, this is one way to avoid getting hit with additional fees.

Most credit card companies allow for automatic payment of your bill, either in full or the minimum balance, monthly. By taking advantage of these programs, you can eliminate the chance that you’ll be charged a late-payment fee on your accounts as well. Just keep track of your due dates and be certain that you have the funds readily available to cover the automatic bank draft, or you could wind up paying just as much, or more, in overdraft fees from your bank.

While changes in interest rates require a notice, these reductions to your credit limit can come without warning, leaving many uninformed about the reduced limits until they receive their monthly statement. Reductions of hundreds or thousands of dollars are not uncommon, and can really put a dent in your credit score, regardless of how responsible you are when it comes to making on-time payments each month. What’s worse, you may be hit with over-the-limit fees on newly reduced balances, when your original spending was well-within your old credit limit.

Many consumers are surprised to realize that unlike interest rate changes, changes made to the credit limit can be done at any time, without informing the consumer. This means that even if you have a $1000 credit limit today, there is nothing stopping the credit card company from lowering that limit to $800, or even $500 tomorrow. The only way to stay informed is to check your account information regularly. If your credit card company offers online access to your account, it may be helpful to check your credit limit in this way.

Another option is to set up an alert that will send you an email or text message when you are approaching your credit limit, but this may not be as helpful in terms of saving your credit. Why? The ratio of how much you spend on your cards, versus your available credit limit is a factor in calculating your credit scores. If you wait until you are only a few hundred dollars away from your limit to set an alert, the damage to your credit score may already be done. While you will avoid any sneaky over-limit fees, you won’t be able to prevent the hit to your credit score that comes from over-utilization of available credit.

If one credit card company reduces your balance, others may follow suit as your available-credit-to-debt ratios will now categorize you as a higher risk. While the logical option would seem to be avoiding the use of your credit cards altogether, this choice can backfire, as many credit card companies are actively closing accounts that do not have any activity after a few months. Your best option is to continue using your cards, and pay off the balances each month if at all possible. This will keep you from having an account closed for inactivity, and it will also keep you from being targeted for credit limit reductions due to carrying a balance each month.

While there is no law that requires your credit card company to keep you informed about your credit limit, you can remain informed by keeping a close eye on your balances, either online or via customer service. Don’t let surprise credit limit reductions derail your good credit – set up alerts, check your balance regularly, and pay off as much as you can to avoid unpleasant repercussions.

• “Any disputes related to this credit card account are subject to binding arbitration…” Binding arbitration means you are not allowed to file suit in a court of law over any disagreement that you may have with the credit card company. It eliminates the possibility of class action law suits, and any number of legal rights. There is no way around this – if you use the card, you are agreeing to the binding arbitration clause. Be aware that your credit card company will most likely be the one who chooses the arbitrator as well, and your usual options for legal relief will be severely limited should you decide to pursue legal action.
• One to watch out for if you are taking advantage of a balance transfer to a lower-interest card: “Balance transfer fees are added to the purchase balance and are subject to the APR for purchases…” This basically means that any fees associated to your balance transfer will be treated as if you made a purchase, and will be added to your credit card balance. In addition, you will pay interest on that balance transfer fee. Something to keep in mind if you are close to your limit with the balance that you are transferring – the balance transfer fee may push you over, and cause over limit fees, just as a purchase would.
• Here’s the phraseology that indicates your credit card is subject to universal default laws: “If the cardholder is reported as delinquent on an account with any other creditor, we may increase the APRs on your account up to the maximum default APR…” Universal default is one of the many terms that will be modified under the new Credit Card Holders’ Bill of Rights, but until that goes into effect, you may be charged a default rate on all credit cards which have this phraseology, even if you’ve only missed a payment with one of those creditors.

The terms and conditions that accompany any new credit card are often lengthy and complex – one of the reasons that many consumers don’t bother to read them. However, this strategy can cost you money and hurt your credit in the long run. Understanding the fine print will help you to make a more informed choice when it comes to your credit, and will help you choose the best credit cards for your overall financial health.

How Double Billing Cycles Work

When a credit card company uses the double billing cycle method to calculate your interest rates, it takes the average of your previous month’s balance and your current month’s balance. What this means is, if you have a balance of $1000 in January, and a balance of $200 in February, the credit card company will average these two balances together and charge interest on the amount of $600. That is $400 more than what you currently owe on the card, and is in effect, interest on a balance that has already been paid.

The double billing cycle creates additional interest charges that can make it very difficult for you to pay off your balance entirely, if you are in the habit of keeping a balance on your card. In particular, it punishes individuals who try to pay down their balances all at once, or who have balances that fluctuate regularly. On the example above, on a credit card with a 12% interest rate, you would pay $1.64 in interest charges for February’s balance, based on the Average Daily Balance method. Under the Double Billing Cycle method, your charges would be $4.93 – three times as much.

What You Can Do About Double Billing Cycle Charges

If you have a card that uses the double billing cycle method, you may want to consider transferring your balance to a card that uses the average daily balance method instead. Otherwise, if you want to minimize the hit that double billing cycle charges can cause, you should gradually pay off the card, avoiding any steep pay-offs that will effectively bill you for money you’ve already given the credit card company.

When considering a balance transfer, make sure you do the math. Factor in any balance transfer fees that you may be charged, and compare those charges to what it will cost you to just pay off your card – you may come out better by just paying the card down, if there are excessive balance transfer fees. Other considerations you will want to keep in mind:

1. The credit limit on the new card – don’t transfer a high balance to a card if that will max out the credit limit. Anything that negatively impacts your available credit to debt ratio will have a negative impact on your credit score as well.

2. The introductory period for finance charges – if you transfer the balance, make certain that you can pay down the balance before your introductory period is up. And make certain that the interest rate applies to the balance transfers as well.

Keep in mind that some credit card companies have recently started closing accounts that do not have any balance or recent activity, so you may wish to keep a low balance on a credit card that uses the double billing cycle method if you’ve had the card for awhile and it has a good history of repayment. By staying informed about what your credit card company is really charging you, you can avoid excessive fees and keep your credit score healthy.

• An end to Universal Default – credit card companies will no longer be able to charge you the default rate on your credit card just because you’ve missed a payment to another card issuer.

• Prevention of double billing cycles – credit card companies will be prevented from using your past billing cycle to increase your interest charges.

• No more retroactive rate increases – rate increases will no longer be applied to past balances, or past billing cycles.

• Mandatory 45 days notice of rate increases – if your credit card company wants to raise rates, it will have to notify you 45 days in advance. This gives the average consumer more time to shop around for a better rate.

• Limited Fees on Subprime Credit Cards – no longer will credit card issuers be able to charge fees upwards of 90% on subprime cards. The new legislation will put a cap on the fees at 50% of the card balance, with only half those fees allowed to be payable at the account opening.

Needless to say, credit card companies are lobbying hard to avoid these new regulations. They claim that credit will be more difficult to obtain for the average consumer if they are not allowed to continue their current billing practices. Whether or not the bill is ultimately approved, credit card rates are unlikely to lower any time in the near future, as the companies attempt to offset losses expected as credit card defaults continue to climb due to the rise in unemployment across the country. Regardless as to whether or not the bill passes, there are some steps that the average consumer can take to minimize the impact of the current credit crunch:

1. Keep your balances low – lower balances means lower payments in terms of interest.

2. Pay all credit card bills early – make certain that you get the payment in well in advance of the due date, as many credit card companies begin charging late fees if the payment is even one minute late.

3. Read the fine print – many credit card companies have started raising the interest rates on all customers, even those who pay on time regularly. Make sure that your current card agreement is one that you can live with.

If the Credit Card Holders’ Bill of Rights does pass, it will be a huge step forward for individuals who want to build and maintain their good credit. The more transparent credit card companies have to be in their billing practices, the easier it is for consumers to make an informed choice about who to turn to for their credit card needs.