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Oct 12, 2009

Why You Need a Credit Card

If you are trying to rebuild your credit, you may think that your best option is to get rid of all your credit cards, or to avoid buying items on credit in the future. However, nothing could be further from the truth; in fact, if you don’t have any credit cards at all, you might find that it takes longer to repair your credit. Even if you’re getting out of debt and paying other bills on time, without a credit card, rebuilding a positive credit history can be difficult at best.

Your credit score is not determined by any one type of credit. Loans, credit cards, and other financial obligations all play a role. In general, credit cards are an important aspect in boosting credit scores because credit cards are an ongoing gauge of how well you pay back your debts, how you manage debt, and how responsible you are when it comes to spending. If you can maintain low balances, pay your credit card bills on time each month, and maintain a solid history of repayment, your credit scores will rise.

Getting rid of credit cards in an attempt to boost your credit scores will backfire. A better option is to choose one or two cards with a decent interest rate, and keep those accounts open and current. You don’t need to charge much – it’s actually better if you keep your purchases anywhere from 10% – 30% of your overall credit card limit. This demonstrates to creditors that you can be responsible with the credit you are given. It also makes it easier for you to pay off the credit card in full each month, which is another way to rebuild your credit scores.

If you have several credit cards, you may wonder which cards are best to keep, and which accounts (if any) you should close. In general, keep your credit card account open if:

You’ve had the card for several years. Having a long credit history is more beneficial than having a short one.

You have a balance on the card. Canceling an account while you still have a balance can wreck havoc on your available-credit-to-debt ratio.

The interest rates are low. Lower interest rate cards can not only save you money, but they can make it easier for you to stick to your repayment goals as well.

When should you cancel a credit card? In general, if the interest rate is high, or if the credit card company uses double-billing, it’s probably a good idea to get rid of that card as soon as the balance is paid off. The only exception to this is if the credit card is one with a long credit history. You don’t want to cancel your oldest cards, so in this instance, your best option would be to charge a very small amount on the card each month, and then pay it off again as soon as possible to avoid the extra interest hit.

If you are trying to rebuild your credit, you don’t currently have a credit card, and don’t think you can qualify to get one, try a secured credit card instead. With a secured card, you put down a deposit for a specified amount (usually anywhere from $200-$500) and in exchange you receive a credit card with a limit equal to the deposit. Charge only a small amount on the card, and then pay it off each month – this will let you build your credit, even if you don’t initially qualify for a regular credit card.

Regardless of which route you choose, getting and maintaining a credit card account is an essential part of any credit repair plan. Don’t assume that all credit is “bad” credit. If you want to be successful in increasing your credit scores, you’ll definitely need a credit card – just be sure to pick one that’s easy to manage, and don’t let the balances get out of hand.

Posted in available credit to debt ratio, credit cards, credit history, rebuild credit, repair your credit | No Comments »



Sep 20, 2009

College Students and Credit – Staying Credit-wise

In the past, college students could expect a slew of credit card offers along with the typical college entrance paperwork. Touting themselves as a way for students to learn responsible spending habits, most credit cards targeting college students instead left these young consumers saddled with cards that charged high interest rates, excessive over-limit fees, and teaser rates that quickly increased with the first missed payment. Under the new laws set to take effect on February 2010, credit card companies won’t be able to extend credit to students without proof of income to repay the balances, or a parental cosigner – but be aware, if you cosign on your son or daughter’s account, it will definitely have an affect your credit scores as well.

When you cosign an account, whether it’s a loan, credit card, or an open line of credit, that account shows up on your credit report as well as the credit report of the individual you cosigned with so that he or she could qualify for the credit. This means that if payments are not made on time, both individuals’ credit scores will suffer. Additionally, the student credit card that you cosigned for will be added to your current available-credit-to-debt ratios and you could be denied additional credit based on the payment and purchasing activity on that card. Keep the initial credit limit low, and make sure any credit limit increases are only granted with your consent – this will help you to effectively manage both your credit scores, and your child’s credit scores.

Credit card companies probably won’t stop their aggressive marketing to students, and you can expect that the new laws will only encourage some credit card companies to offer additional incentives for new students to get their parents’ agreement to sign up for the card. If you have a student who is currently in college, or that is approaching college age, now is the time to help explain to them how credit cards work – keeping balances low, making payments on time, and paying off more than the minimum balance each month can actually improve your child’s credit, and yours as well if managed carefully.

If your student will be attending college out of state, it can be difficult to keep track of credit card activity. One way is to sign up for email alerts on purchases, or when the card is approaching its limit. Be aware of how much your child spends while in school, and help him or her to create a budget that will successfully track spending and reduce the risk of over-limit fees. Even better: opt out of any over-limit fees on the new card, and avoid getting hit with extra charges if your student does max out the card.

It’s never too soon to learn the lessons of responsible credit use; just be certain that your college student’s spending habits don’t end up costing you your good credit. Stay informed when it comes to purchases, encourage responsible spending habits, and don’t be afraid to take the credit card away or cancel the account if your child proves that he or she is not ready for the responsibility – it’s better to cancel a card with a small limit early on than it is to pay thousands in fees and late charges down the line.

Posted in credit card offers, credit cards, credit report, credit scores | No Comments »



Jul 6, 2009

Credit Card Agreements – Understanding the Fine Print

With the passage of the Credit Card Holders’ Bill of Rights, credit card companies will be required to make some changes in their disclosure practices when it comes to credit card agreements. Until these changes go into effect, if you are shopping for a credit card, it’s important to understand the terms and conditions included in the fine print of your credit card. Otherwise, you could find yourself owing hundreds more in unexpected fees and interest, which in turn, may damage your credit scores. Below is a list sampling the most common terminology found in credit card agreements, and what these terms actually mean to you, as a consumer:

  • “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.

Posted in Credit Card Holders' Bill of Rights, balance transfer, credit card companies, credit cards, credit repair | No Comments »



Jun 5, 2009

Double Billing Cycles: Is Your Credit Card Company Charging You for Paid Balances?

It’s common knowledge that paying down your credit card balances is good for your credit, and can help you to improve your credit score. However, your credit card company’s billing practices may make repayment more difficult over the long term. Some credit card companies even charge interest on the same balances twice – regardless of whether you’ve paid the balance or not. It’s a practice that is typically referred to in the disclosure of credit card terms as “two-cycle average daily balance”. What it amounts to, however, is double billing, plain and simple.

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.

Posted in credit card companies, credit cards, double billing cycles | No Comments »



May 26, 2009

Should I Close My Credit Card Account?

Five Considerations to Keep in Mind When Closing Accounts

With the interest rate hikes that have affected thousands of consumers across the United States, many consumers are considering closing credit card accounts as a means to avoid these higher fees, and to keep their credit under control. However, closing a credit card account should never be a rash decision – you need to take into account several factors when making the choice. In some cases, closing a credit card account may do your credit more harm than good. The following are five issues to think about when dealing with a credit card account and whether or not you should close it.

1. The Age of the Account – if the credit card is one of your oldest credit card accounts, closing it will erase much of your payment history. Creditors typically place a high value on the length of time that an account has been opened, so if you shorten your credit history, you may damage your credit score.

2. The Balance of the Account – if the account is currently carrying a balance, don’t close it. Pay off the account first, and then close it. When you close an account, the available balance is shown as $0, so if you close an account that has a balance remaining, it will appear that you have maxed out your credit card – a sure way to lower your credit score.

3. The Terms of the Account – compare the terms of the account you are thinking of closing to the terms on your other cards. If the account has better terms than some of your other cards, you may want to reconsider closing the account.

4. The Balance of Other Credit Card Accounts – if your other credit cards are carrying a high balance, closing your credit card account may damage your available credit ratios, which in turn will result in a lower credit score.

5. The Number of Other Credit Card Accounts – never close your only credit card account. Having a mix of different types of credit is an important part of your credit score. If you need a card with better terms, shop around until you find one that suits your needs better, and transfer your balances, rather than close out the account.

Once you’ve made the decision to close a credit card account, do so formally – write a letter to the company asking for the account to be closed. In addition, make certain to request a letter stating that the account is being closed in good standing. This can be important for your records in case you need to put a statement on your credit report explaining the account’s closure. Additionally, be certain to destroy the old cards, including cards that others may have had as authorized users of the account. This will minimize the chance of identity theft, and will avoid any inadvertent attempt to use the card in the future. Closing a credit card account can be a wise move, but only if you make certain that it won’t harm your ability to get new credit in the future.

Posted in credit cards | No Comments »



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