Ready, Set Credit
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.
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. Even if you get 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 report. If you’ve financed a car loan
or other purchase, you probably have a record at a consumer reporting
company. 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.
You also can review a copy
of your credit report to make sure it’s accurate. A recent
amendment to the federal Fair Credit Reporting Act (FCRA) requires
each of the nationwide consumer reporting companies — Equifax,
Experian, and TransUnion — to provide you with a free copy
of your credit report, at your request, once every 12 months.
The companies are rolling this out across the country during
a nine-month period. By September 2005, consumers from coast
to coast will have access to a free annual credit report if they
ask for it. For details, see Your Access to Free Credit Reports
at ftc.gov/credit.
If you’re not yet eligible
for a free annual credit report under the new federal law, you
can buy it. Contact:
Equifax — 800-685-1111
(www.equifax.com)
Experian — 888-397-3742
(www.experian.com)
TransUnion — 800-916-8800
(www.transunion.com)
Your report may cost up to
$9.50. Under state law, consumers in Colorado, Georgia, Maine,
Maryland, Massachusetts, New Jersey, and Vermont already have
free access to their credit reports.
Establishing a Credit History
Suppose you haven’t financed
a car loan, a computer, or some other major purchase. How do
you begin to establish credit? Consider applying for 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.
Also 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, the creditor must tell you so and why. It may be
that you haven’t been at your current address or job long
enough. Or, your income may not be high enough. Different credit
card companies have different standards. But if you’re turned
down by several companies, it may indicate that you are not ready
for a credit card.
If you don’t get the card
because of information in your report, the creditor must tell
you how to get a copy of the report from the consumer reporting
company that provided it. There is no charge for the report if
you request it within 60 days of getting notice that your application
was denied. Review your report carefully. According to the FCRA,
both the consumer reporting company and the information provider
(that is, the person, company, or organization that provides
information about you to a consumer reporting company) are responsible
for correcting inaccurate or incomplete information in your report.
To protect your rights under the law, contact both the consumer
reporting company and the information provider to dispute any
information. For more information, see How to Dispute Credit
Report Errors at ftc.gov/credit.
Getting 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. If the card offers a very low
introductory rate, find out what the rate will be after the initial
period. Ask about other limitations on the initial rate. For
example, is it only for balance transfers, and not regular purchases?
Be aware that some companies have high penalty rates. For example,
if you’re late paying your bill, your rate may increase
significantly. Ask when the company may apply a penalty rate
to your account.
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 don’t 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.
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, like insurance, credit card protection,
discounts, rebates, and special merchandise offers.
Credi-quette
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 any
questionable charges to the card issuer in writing.
Don’t lend your card to
anyone, even a friend. Your credit privilege and history are
too precious to risk.
You Are Responsible
While a credit card makes it
easy to buy something now and pay for it later, if you’re
not careful, you can lose track of how much you’ve spent
by the time the bill arrives. 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 your debt, you
could tarnish your credit report. And that can have a big 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 billing error notice. You do not have
to pay the amount in question, and related fees like the finance
charges, during the investigation.
Unauthorized Charges
If your credit card is used
without your authorization, you can be held liable for up to
$50 per card. If you report the loss of a card before it is used,
the card issuer cannot hold you responsible for any unauthorized
charges. If a thief uses your card before you report it missing,
the most you will owe for unauthorized charges is $50. You should
be prompt in reporting the loss or theft of your card to limit
your liability.
Kind 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 there are no 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. |