Credit Matters
A Primer on Credit Card Use
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 fix.
Chances are your mail is full of offers from credit card issuers. How do
you know if the time is right for a credit card? Here is 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.
Please note that this guide was designed primarily for a U.S.
audience. While many of the general topic areas may be relevant in other parts
of the world, specific details are U.S. based.
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
agency (CRA) (The most common type of CRA is the credit 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. Contact the credit bureaus listed in the telephone
directory under "credit" or "credit rating and reporting." Because more than
one credit bureau may have a file on you, call each until you locate all the
agencies maintaining your file. The three major credit bureaus are:
- Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
1-800-685-1111
- Experian (formerly TRW)
P.O. Box 949
Allen, TX
75013-0949
1-888-EXPERIAN (397-3742)
- Trans Union
P.O. Box 390
Springfield, PA
19064-03090
1-800-916-8800
Anyone who takes action against you in response to a report supplied by
a CRA – such as denying your application for credit – must give you
the name, address and telephone number of the credit bureau that provided the
report.
Establish a Good 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 issued by a local store and use it responsibly. Ask 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 nonsecured 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 a 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, address and
telephone number of the bureau that supplied the information. If you contact
that bureau within 60 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.
You should dispute any inaccuracy in your report with the credit bureau
and also with the company that furnished the information to the credit
bureau.
Get 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 percent interest and a low 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 your 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.
Kinds of Credit Accounts
Credit grantors generally issue three types of accounts. The basic terms
of these account agreements are:
- 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.
Protect Your Credit
Once you get a card, sign it immediately so no one else can use
it. Note that the accompanying papers have important information, such as
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 your 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
letter. You do not have to pay the amount in question during the investigation.
- Loss or theft. If you lose your credit or charge cards, or if
you realize they’ve been lost or stolen, immediately call the issuer(s).
By law, once you report the loss or theft, you have no further responsibility
for unauthorized charges. In any event, your maximum liability under federal
law is $50 per card.
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