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.

However, a credit card can also be one of your biggest allies on your path to financial freedom. One of the biggest rules of financial security is to make interest work for you and not against you. This principle can be applied in the world of credit cards. As long as you are not paying interest or fees on your credit cards, they can be a great benefit. On the other hand, if you are paying interest, you are depriving yourself of the benefits credit cards offer. Credit card users who pay interest are in a sense paying for the benefits of the credit card users who do not pay interest. Credit cards offer a wide array of benefits, such as purchase protection, improved credit scores, cash back, and discounts, but they also pose risks to people who are not smart with how they use them.

Benefits of a credit card

I use a credit card for all of my purchases. I love the convenience it offers me and the benefits it awards me. Here is a list of some of the benefits I enjoy from using a credit card:

• Cash back. Every year in February, I receive a few hundred dollars in the mail for what basically amounts to free money. I get paid 1% cash back on every purchase I make (other cards offer even higher returns) and it doesn’t cost me a dime. I don’t pay anything extra because I never get charged interest.
• Convenience. By now, almost everywhere accepts a Visa card. With only a very small wallet with a couple cards in it, I can buy anything I need anywhere I need it.
• Chargebacks. When you use a debit card, you are paying for things with your money. When you use a credit card you are essentially using the bank’s money – at least until you pay it back. This may seem like a small difference, but it is not. If you notice an erroneous charge on your credit card, you can dispute that charge and be refunded that amount in full. In addition, banks have entire divisions dedicated to handling chargebacks and making sure that their customers are taken care of. If you used a debit card, you cannot charge items back to your card, and you will have to deal with the headache on your own.
• Additional benefits. Credit cards offer other benefits such as rewards points, frequent flier miles, purchase protection, and discounts on items.

Credit cards can help you improve your credit score

Another one of the biggest benefits of a credit card is that it can help you to increase your credit score. Credit reporting agencies will typically look at a credit card with a low balance as a thing that will help your credit score.

What should you look for in a credit card?

Not all credit cards are created equal. There are several things that you should look for when looking into a new credit card:

• Make sure that the card has no annual fee. There are plenty of cards out there that do not charge an annual fee.
• Make sure that you don’t sign up for a new card just because you received the offer in the mail. Ideally, you will seek out the credit card company yourself.
• Make sure that the credit card offers you benefits. Cash back is one of the most useful benefits you can get from a credit card.
• Try to get a low interest rate. You should typically try to avoid any credit card with an interest rate above 10%.
• Try to get a high credit limit. A credit card with a high credit limit and a low balance will usually help your credit score.
• Always look out for hidden fees and other things that can be added on without you knowing. Make sure you are always monitoring your monthly statements.

A word of warning

Using a credit card can be a valuable asset to helping your credit score and your finances. However, if you are unable to control your spending with a credit card, no not use a credit card. Credit cards can be very dangerous if they are misused. Especially if you are younger, please make sure that you are aware of what you are getting yourself into before you sign up for a credit card.

The point I am trying to make is that paying a ton of money to a bank in interest for a very long time doesn’t seem like a great plan to me.  If getting a credit card for your bad credit is the first step in a big plan to improve your bad credit than go for it; if you don’t have a plan here are some suggestions:

• Learn Your Credit Rights – There are lots of laws that allow you to challenge negative items on your credit report. We are currently working on developing a legal section that will layout all of these laws in a way that make sense and let you talk with confidence to your creditor or a collection agency about your consumer rights.
• Start Working With Creditors to Remove Negative Items – If you write a letter to old creditors, they be willing to work with you. You will never know until you try.
• Get Out of Debt – Decreasing your credit utilization on your existing revolving credit lines can have a positive impact of your credit score.

Remember just getting a credit card for bad debt isn’t a complete plan to increase your credit score.

Some gas stations place a large hold on your credit or debit card – anywhere from $75-$100 – when you pay for gas at the pump, while others charge only a cursory $1 hold fee, regardless of how much you actually pump. In both cases, the actual charge isn’t posted until days later. If you go shopping in the meanwhile, your available balance will reflect the amount held by the gas station. If this is more than the amount that you actually spent, you’re safe. But if this amount is less, you can run into problems.

For example: You fill up your gas tank for a modest $50. The gas station, however, only puts a $1 hold on your card. You check your balance at the ATM day later, expecting an accurate statement, but in reality, the $50 has yet to post to your account. Thinking that you have more money available than is the case, you stay within the balance shown on the ATM statement, but overspend because the $50 you spent on gas doesn’t post until 2 days later. Your bank will likely charge you at least one overdraft fee when the gas purchase finally posts to your account, and you may be charged more than one overdraft fee if there are pending transactions at the store which were approved based upon the erroneous balance.

Another example: If you rent a car with your debit card, most companies place a hold on the card equal to the charge for renting the car. However, this hold often expires within a week, so if you rent the car for longer, the initial hold on your funds is released. When you check your balance several days later, it would appear that you have money to spend, when in reality the rental charge hasn’t gone through yet. When you take the car back, the company may not even charge your card until the end of the day’s processing, at which point it may be declined or (because of the previous hold) you may be charged overdraft fees retroactively.

These types of overdrafts can happen in any instance where a temporary hold is placed on your card. If the transaction is later declined and you avoid the bank fee, you can still expect to pay fees from the merchant, who will then be forced to track you down for payment. The only way to avoid this type of scenario is to keep track of which charges are pending and which have actually posted in your account. In short: you can’t trust the balance inquiry from the ATM to be accurate if you’ve recently made these types of purchases. Other ways to avoid the risk:

1. Don’t pay at the pump. Go inside and pay – when you pay inside the gas station, the charge typically reflects what you actually spent, rather than an arbitrary hold.

2. Keep track of the hold amount, and ask to pay in advance if possible. Some rental companies and hotels will allow you to pay the fees from your debit account up front. Keep in mind that if you rent the car or stay at the hotel for longer than the original agreement, a hold will still apply.

While banks can’t let you spend money you don’t have if you don’t opt into overdraft protection, the bottom line is that you still have to be wary in order to avoid a hit to your wallet and your credit. Take the time to confirm that the money is really there before you spend, and you’ll save yourself a lot of unnecessary fees.

1. Charge-offs

While at first glance charge-offs may look like you no longer owe creditor, in reality the creditor has deemed your debt to be a “lost cause” and has written off the debt or sold it to a debt collector. Typically, this only happens after several missed payments — anywhere from 3 to 6 months of nonpayment could land you with charge-off on your credit report.

Charge-offs are particularly damaging because they indicate that you are either unable or unwilling to pay off a debt, and are unwilling to work with creditors to find suitable payment arrangements. If your debt is sold to a debt collector, they too may place a negative item on your credit report, resulting in two negatives for one unpaid bill.

2. Maxed Out Credit Limits

Even if you pay your bills on time and avoid charge-offs and debt collectors, maxing out your credit cards will make it difficult for you to obtain new credit in the future. Having a high debt-to-available-credit ratio can take several points off of your credit score. Additionally, many lenders hesitate to extend credit to someone who is already maxed out, even if you are current with all of your bills.

If your cards are at their limit or close to it, work on paying down the balance. You should carry a balance of less than 30% of your credit limit from month to month in order to keep your credit scores healthy.

3. Lack of Credit or “Thin” Credit

If you’ve closed your old, unused credit card accounts, you may find it more difficult to open new accounts in the future. Likewise, if you’ve never had credit, expect to have less favorable financing terms than someone who has already established his or her credit. Because credit scores rank you on your credit history, having little or no credit accounts can mean that you will get turned down for many forms of credit because you don’t have a payment history that creditors can use to gauge your risk.

If you need to establish or reestablish your credit, a secured credit card may be one way for you to build a positive payment history while still taking advantage of favorable credit terms. Keep in mind that student loan repayment can also count, so if you have student loans, paying them off can contribute to establishing a positive payment history as well.

There are no easy answers when it comes to obtaining the best credit score possible. If you are having problems with negative credit and low credit scores and you can’t resolve the issue on your own, the next step may be to seek help from a professional credit repair company. A reputable credit repair service can help you to evaluate remove listings on your credit report. Negative items that aren’t accurate can be disputed, which will significantly raise your credit scores if you are able to have them removed.

These credit cards still typically have very low credit limits initially – anywhere from $200 – $500 to start – and they still charge the maximum amount in fees to start, so you’ll also have to deal with an opening balance before you make your first purchase. While the fees will not consume your entire credit line, from the moment you make that first purchase, you’re locked into that high interest rate. At 79% APR, that means for every $100 you spend, you’ll pay back an additional $79 on that debt in the course of a year. These interest rates are entirely legal under the new credit card laws as long as they are prominently disclosed in the terms and conditions of the credit card offer.

Subprime credit card companies know that most people won’t sign up for a credit card that has such a high interest rate, but they are counting on the fact that most people won’t read the terms and conditions. Instead, they tout your pre-approved status in the invitation letter, and point out the reduced fees and increased purchasing ability without ever mentioning interest rates. It’s only when you look at the fine print that you realize the interest rate is more than double most subprime rates of the past.

If you have the money to pay off the initial fees and the additional interest charges, a secured credit card may be a better option. In addition to providing an opportunity to establish a solid repayment history, secured cards offer the added benefit of establishing a savings or money market account that can help your finances grow. If you don’t have the money to pay off the initial fees, one of these subprime credit cards can quickly wreak havoc on your credit scores, as any charges that you make on the card will accrue interest that will make it difficult, if not impossible to pay off the charges and keep your available credit ratios within acceptable levels.

If you’ve had credit problems in the past and haven’t opted out of pre-screened credit card offers, chances are good that you have, or will soon be receiving those ‘preapproved’ offers from various subprime credit lenders. Don’t be fooled – always read the terms and conditions before you sign up, and don’t let subprime credit card companies put your efforts to improve your credit scores at risk.

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.

Most, if not all, of these offers are scams — you pay the money and you receive nothing in return. The most famous of these “no FICO” credit card companies is a known scam, and the Attorney General has made an arrest in connection to the fraudulent credit scheme.  London Exchange, based out of Santa Ana California, has allegedly scammed consumers out of hundreds of thousands of dollars. The owner of this company is currently under arrest; however, there are no details about whether or not the consumers who were scammed can expect to see any of their money returned.

However, even if some of these “no FICO” arrangements are legitimate, they do nothing to help you improve your credit score, and in fact may only cause more financial troubles down the line. Because you essentially sign an agreement to be responsible for the trade line, you could be held responsible for other individuals’ payments on the same trade line. So if one individual on the agreement racks up debt and then defaults, everyone else using the trade line may then be charged and held accountable for that default.

Assuming that everyone pays as agreed and no one defaults on the trade line, there are still problems – namely, that all of your timely payments are doing nothing to improve your credit scores, or help you to reestablish a solid history of repayment on your credit report. The bank issuing the trade line does not report these payments to the credit bureaus, as the credit is never applied for in your name. While some individuals may see this as a benefit, due to the fact that it will not show up as a financial obligation when someone pulls the credit report, it still must be listed on any applications for new credit, and failure to do so could be considered fraud.

Credit troubles are becoming more common in the current economy, as individuals who may have had excellent credit scores in the past struggle with unemployment, rising housing costs, and other financial issues. As credit limits are lowered even for individuals with an excellent history of repayment, and people continue to look for alternative methods of financing, one can expect these types of scams to continue. Your best option when it comes to evaluating any potential extension of credit is to be vigilant with your research, and to turn down any offer of credit that requires high fees up front.

Source: http://ag.ca.gov/newsalerts/release.php?id=1813

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.

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.