Credit cards have become a necessity in today’s technology-driven economy.  A credit card is a convenient payment method accepted almost everywhere.  It allows you to receive valuable rebates, earn free merchandise and services, and take advantage of mail order and Internet discounts.  However, not all credit cards are created equal and accepting an offer is a major decision that requires some homework.

So, whether you have never owned a credit card, or are a seasoned “revolver” (carrying a balance month to month rather than paying the full balance each month) here is some basic information to help you become an informed and responsible credit card consumer:

Find out your credit score and review your existing credit.  This information will give you a good idea of what interest rate to expect.  In general, the higher your credit score, the lower your interest rate.  You may also be able to avoid annual membership fees and monthly participation fees with a high credit score and a good credit history.

Do not apply for every credit card offered to you.  When you apply for a credit card you allow creditors to review your credit report and credit score, and too many inquiries can lower your credit score.  So, the next time you are offered an incentive or discount as a reward for applying for a credit card, consider the possible consequences.

Pay close attention to the terms of the credit card.  The annual percentage rate (APR or interest rate), late fees, over-limit fees, balance transfer fees, cash advance fees, membership fees, and participation fees can all add up – you may end up paying more than you ever anticipated.  Make sure the interest rate is a fixed-rate percentage and can only be changed with 15 days written notice. Avoid variable interest rates – managing payments can be difficult with a fluctuating and unpredictable interest rate.

Know the grace period of the credit card.  The grace period is the period of time you have to pay the credit card balance in full each month without incurring interest charges.  The grace period should be 25 days or longer, and by law, must be prominently displayed on the credit card application.

Be aware of credit card company practices.  Remember, credit card companies are in the business of making money, and they currently enjoy tremendous freedom in their business practices.  For instance, they are able to monitor all of your credit accounts and can use this information to track your credit history.  You may find your interest rate raised on one credit card because you made a late payment on another account.

When used properly, a credit card can be a valuable and convenient financial tool, but you must choose wisely.  Before accepting an offer, you need to understand the many (and sometimes confusing) terms and obligations of the credit card agreement.  By making an informed decision, you will be able to confidently enjoy the many benefits of owning a credit card.

Learn More!
Consumer Action 
www.consumeraction.org
This informative site features credit card surveys with interest rates, fees and other terms for dozens of credit cards, as well as free brochures and guides on choosing and using credit cards.

For more information, please contact Andrea Hardy at the CRT H.O.M.E. (Home Ownership Made Easy) Center.  She can be reached at 860-560-4210 orhardya@crtct.org

Most of us do not strive for bad credit. Layoffs, illness, divorce, and unexpected expenses are not things we plan on or look forward to, but they happen. If you have gone through a financial hardship and your credit rating has suffered, what should you do?

Fortunately it is not incredibly difficult to reestablish a good credit history. One of the easiest ways to get started is by obtaining a secured credit card. A secured card works just like a regular credit card, but with one difference—it requires a cash deposit. Your credit limit is usually determined by the amount of your deposit. Sometimes the credit limit is equal to the amount of your deposit; sometimes it is a bit more.

Before you use the secured card, take a moment to recall what caused your credit to suffer in the first place. Did you have an unexpected hardship, such as job loss or illness? Did you take on more debt than you could handle? Did you mismanage your money? Whatever the reasons were, remember that if they happened once, they can happen again.

The next step is to ask yourself if your situation really has improved. One of the most common traps consumers fall into is that they do not change their spending behaviors to match their new situation. The best way to get a handle on your spending is to create a budget. Once you have your budget on paper, ask yourself the following questions:
 
Does my income cover all of my expenses? If not, you need to either reduce your expenses or increase your income. Now is not the time to take on more debt.

Do I have any savings? If not, what kind of financial cushion do you have in case of an emergency? It is recommended that you have savings equal to four to six months of expenses. For many people, it can take quite some time to save this amount of money. Chances are good that if you are trying to reestablish your credit rating, you do not want to wait that long. There are practical issues to think about, such as having the ability to purchase a car or a home in the near future, and most of us need good credit to get those. To make sure you are comfortable taking on another monthly payment, pay yourself each month just as you would pay a creditor. Continue to pay yourself for four to six months. Start by opening a savings account with your next paycheck. By paying yourself each month, you will be saving some money and showing yourself what kind of effect new debt will have on your budget.

Can I afford to make another payment on time, every month? If there is any doubt, do not take on more credit. If you miss payments, you will continue to damage your credit rating, not reestablish it.

How much of a balance can I pay off all at once? You do not want your credit limit to exceed your ability to pay the balance in full. By keeping your credit limit down, you will never find yourself overextended. Remember, with a secured credit card, your deposit determines your credit limit, so you have some control over your credit limit. This system makes it easier to keep your balance manageable.

Once you reach the point where you are getting unsolicited credit card offers in the mail, do not apply for any unless they offer favorable terms. Just keep doing what you are doing, and over time you will see better offers as your credit rating improves.

Do not open too many accounts. Having too much available credit can hurt your credit rating as well as tempt you into old spending habits.

Maintaining a good credit rating is more than making timely payments; it requires sound money management and intelligent choices. 
 
Thom Fox is a public speaker and personal finance author who has helped develop numerous programs for young people and adults. As an expert in the field of personal finance, he has served as a guest lecturer for the Bruce Wells Scholarship Upward Bound program at Clark University and as a panelist for the Nichols College “Cycle of Debt in America” student Q & A and the California JumpStart Coalition “Innovative Financial Literacy for Youth” conference.

Credit scoring and the credit world are mysteries to most of us, and everyone has an opinion about how to fix bad credit, what harms our scores, and how to raise scores. Be careful! Everyone’s situation is unique, and the wrong method or plan can mess things up for you and your chances of buying a home.

At a trade show I met a young woman whose credit score was in the high 700s, and she was going to buy a house within the year. “I want to raise my credit score higher, so I’m going to close some of my credit card accounts,” she told me.

Not being a specialist in this field, I could not tell her if canceling accounts would help or hinder her, so I told her, “No, don’t do anything without speaking to a qualified professional.”

You would not diagnose yourself and perform surgery on yourself, so why would you play with your credit if you don’t know for sure what will happen? Ask questions, get information, and get professional advice or save money and perform your own heart transplant. The results will probably be the same as playing with your credit without being informed: disaster.

Here are the six myths that Lau covered in his article, along with some additional comments from others:

Myth # 1 Closing accounts will increase a credit score

Closing accounts actually can hurt your credit score. It is often thought that if someone has many open lines of credit, it is better to close some of those accounts, but there are two main reasons why closing accounts can hurt a score.

First, closing accounts will reduce the amount of available credit. Because a credit score measures the difference between available and used credit, balances appear larger when available credit is reduced.

Second, credit scores take into consideration the length of time that your have had credit. Closing accounts can make your credit history appear shorter than it actually is, thereby reducing their credit score.

“Both of these statements are correct,” says Thom Fox, community director coordinator for Cambridge Credit Counseling, “however, having too many lines of credit on your report can also hurt. Generally we recommended people not cancel cards as a short-term measure to improve their credit score. In that instance, these two statements would apply: If you are in the process of looking for a home and do not have the intention of purchasing one for twelve to twenty-four months, you can close unused cards.

“An analogy we use is that your credit score is like a cut,” Fox quips. “If you do the right things to it and keep it clean, it will heal itself over time. With that being the case, when the time comes to purchase a home in this scenario, your score should have leveled out.”

Myth # 2 Having your credit checked can hurt your score

Two types of inquiries can be made into a credit file: hard inquiries and soft inquiries. Hard inquiries occur when you apply for a new line of credit. These appear in the credit file. Having multiple hard inquiries in a short time can hurt your score. Consumers who open many lines of credit in a short time appear risky, because they could be expanding their debt obligations.

Soft inquiries, on the other hand, do not affect credit scores. These occur when you request to view your score or when a credit card company views your profile to make a promotional offer. Although a credit company is viewing your file, the inquiry does not impact your credit score unless you apply for a line of credit.

It is important to note that if you need to have your credit score checked more than once, do so within a specific timeframe in order to avoid multiple inquires. For allotted timeframe, please consult a homeownership professional.

Myth # 3 Married couples have merged credit scores

Married couples have separate credit files and therefore they have separate credit scores. When applying for a mortgage, a couple can apply as a borrower and co-borrower with separate credit information. A married couple’s credit score cannot be merged to get a better average score, but Fox adds, “Typically a mortgage lender will take the middle credit score of the highest wage earner and base the financing terms on that score.”

If the couple has any joint accounts, the information will appear on both their credit files. It is recommended that if one spouse has poor credit, he or she not be named on the loan application.

Myth # 4 Disputing information removes it from credit reports

Although disputing incorrect information can have benefits, people can misinterpret the limitations of error disputes. If there is an error on your credit report, you should file a dispute with the credit issuer, which then has thirty days to investigate the dispute. After thirty days, the dispute is resolved or removed from the credit report. Many borrowers incorrectly assume that if a dispute is filed, the information will be removed from their credit reports immediately.

Filing a dispute against incorrect information, but not against unfavorable information, is recommended. You cannot dispute correct information that is hurting a credit score and expect it to be removed. Credit companies investigate thoroughly and can easily recognize when a false dispute has been filed.

Fox notes that during the thirty days that the agency is allowed for investigating an item, it must communicate with the information provider regarding the item in question to determine whether or not the dispute is valid. “The information provider must conduct a review of the claim and report its findings to the agency. If the information provider finds that the disputed information is inaccurate, it must then notify all three credit-reporting agencies so the consumer’s reports can be updated. If the investigation does not resolve the dispute, the consumer has the right to add a statement of one hundred words or less to his or her file, which must be included in future reports. At the conclusion of the investigation, the agency must provide the consumer with a written account of the outcome. If the investigation results in any change, agencies are also required to provide an updated copy of the consumer’s report.

“The Fair and Accurate Credit Transactions Act (FACTA) of 2003 significantly updates the earlier FACTA with additional provisions to assist consumers in resolving disputes. One such provision allows consumers, in certain circumstances, to dispute inaccurate information directly with the information provider. Upon receiving notice of the consumer’s dispute, the information provider must review the claim and suspend any negative reporting while the investigation is pending.

“Should the dispute arise from a credit report that was provided free to the consumer by an agency, the agency has forty-five days to conduct an investigation of any items in question. All other disputes must be completed within thirty days, as originally outlined in the FACTA.” Said Thom

Myth # 5: A higher salary means a higher score

A person’s salary plays no role in determining credit scores. A person may have a high salary, but he or she also might have a lot of debt.

If you have a low score, raising your salary will not improve your score. Instead, you should pay down your obligations, avoid making large purchases in the near future, and pay your bills on time.

Myth # 6: Maxing out credit cards will improve credit

Maxing out your cards can have a negative impact on a credit score. In fact, it is one of the worst things that borrowers can do to their credit file.

Maxing out credit cards reduces borrowers’ available credit while increasing their debt. Borrowers with maxed-out credit cards look risky to lenders because they appear to be incurring debt at a much quicker rate than they are paying it off. The more creditors that are owed, the more wary a lender will be about receiving payment.

The best advice to give borrowers about credit cards is this:

1. Keep the number of credit cards to a minimum.
2. Always pay bills on time.
3. Keep credit-card balances at thirty percent of their available credit.

Resources:

Scotsman Guide January 2006. Author Jeff Lau is the director of marketing for Informative Research. www.scotsmanguide.com