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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, its 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.
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:
Information Services, Inc.
P.O. Box 740241
Atlanta, GA 30374-0241
P.O. Box 949
Allen, TX 75013-0949
|Trans Union Corporation |
Trans Union Consumer Relations
760 West Sproul Road
P.O. Box 390
Springfield, PA 19064-0390
A credit card's grace period refers to the number of days before the card company starts charging you interest on new purchases. Many consumers think that with practically every card all their purchases are interest-free for at least 25 days regardless of the previous balance. It's getting harder to find a credit card that offers that kind of free ride on finance charges,.
Some cards still offer a "full" grace period. That would mean 25 days or more of interest-free purchases, even if you're paying interest on an outstanding balance from the previous month. However, with the typical credit card nowadays, if you carry over as little as a penny from the previous month's balance you can expect to be charged interest immediately on new purchases. And, if you have a card with no grace period, you always pay interest on new purchases from the day you make the purchase, even if you pay your bill in full.
The bottom line: Try to understand a card's rules governing the grace period as well as the interest rate and fees. You can do this by reading the literature provided by the card issuer and, if you have questions, calling what's usually a toll-free number for customer assistance. Also, think about how you plan to use a card, especially if you expect to carry a balance most months. Then try to choose and use the card that's best for you.
Credit grantors generally use three types of credit accounts:
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 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.
Fees, charges, and benefits vary among credit card issuers. When you're choosing a credit card, shop around. Compare these important features:
Key Credit Terms to Consider in the Credit Card Agreement are:
Shop among some of the credit card issuers listed in this brochure. Compare them with cards you already have and with offers you receive in the mail for the terms that best suit your spending and repayment habits.
Smart consumers find the best deal for their budgets and repayment style. If you always pay your monthly bill/s in full, the best type of card is one that has no annual fee and offers a grace period for paying your bill without paying a finance charge.
If you don't always pay off the credit card balance/s at the end of the month, be sure to look at the annual percentage rate.
|Terms||Card A||Card B|
|Average monthly balance||$2,500||$2,500|
|APR||x .18||x .14|
|Annual finance charges||$ 450||$ 350|
|Annual fee||+ $20||-0-|
|Total Cost||$ 470||$ 350|
Other features to consider are enhancements to the credit card that the issuer offers. Enhancements can include cash rebates, purchase protections, warranty guarantees and usage incentives such as frequent flyer miles.
See Interactive Credit Card Calculators:
Perks . . .
Also called "enhancements," these include cash-back rebates and frequent-flier mileage. Though perks sound appealing, these cards often have high interest rates, some charge you to use their incentives. Read the fine print.
If you're carrying large balances on high-interest cards, consider transferring the sum to a lower rate card. Make sure the interest rate after the lower initial rate is not higher then your present cards. And don't do it often — you may appear less creditworthy.
Also check to see if your current card issuer will match the new offer. All they can do is say "no."
See Interactive Credit Card Calculators: Which is better: Flight Card or Low Rate Card?
The Federal Reserve System collects and publishes a report on the terms of credit card plans offered by financial institutions. This list includes information supplied by the largest card issuers in the country with the lowest APR.
The credit terms listed are subject to change. Consequently, readers are encouraged to contact the credit card issuer for current rates and to learn about their other credit plans.
Other Web Site for Current Rates:
cardweb.com helps you find some of the lowest rate credit cards.
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 issuers 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.
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 number to yourself. Never give out your credit card number or expiration date over the phone unless you know who your 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.
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, you're 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 law offers the following protections when you use your cards.
See other Web Sites on Credit Cards.
The Federal Trade Commission (FTC) offers free booklets on credit and other topics of consumer interest. Access the FTC ConsumerLine. Or get a free copy of Best Sellers, a complete list of FTC publications, from Public Reference, Federal Trade Commission, Washington, D.C. 20580; (202) 326-2222; TDD: (202) 326-2502.
The Federal Consumer Information Center publishes the free Consumer Information Catalog, which lists more than 200 publications from a variety of federal agencies, including credit. Access the Catalog and its full-text entries or write to Catalog, Consumer Information Center, Pueblo, CO 81009. Or call them at (719) 948-4000.
American Express Company offers free consumer booklets on a variety of credit subjects. To order, contact: American Express Company, P.O. Box 4635, Trenton, NJ 08650-4635. For information about students and credit, you can visit American Express Student Services or access American Express Company.
Bankcard Holders of America (BHA) is a nonprofit consumer organization that provides credit information as well as customized advice on credit problems. You can write BHA, 524 Branch Drive, Salem, VA 24153; (540) 389-5445.
cardweb.com helps you find some of the lowest rate credit cards.
Note: The links on this page that go to web sites outside of this agency's control are provided as a convenience only. The Department takes no responsibility for their content.