Tag: credit cards

Build Credit: Using Credit Cards As Tools of Financial Freedom

Posted on February 4, 2011 by - CREDIT BLOG

Credit cards have gotten a bad reputation as more and more people view these cards as vessels for temporary financial freedom. The thought of being able to buy whatever you want even if you don’t have the cash readily available is exhilarating. As times have gotten harder and more and more people are relying on credit to help them through, retail therapy has become a quick emotional fix. Unfortunately, if you don’t know how your spending habits hurt or help your credit, you could be paying for more than a quick dose of endorphins.
While credit cards certainly provide access to splurge on these instincts, that doesn’t mean they are all bad. In fact, it’s actually important to maintain three credit cards in order to improve your credit score. This may sound confusing, but your credit card history is a crucial factor in determining your overall credit score. As with many things, there are some points to watch out for. When using credit cards, you’ll want to keep these tips in consideration:

  • Always remember the 30/30 rule. 30 percent of your credit score is based on your outstanding debt, and if your credit balance is more than 30 percent of your credit limit, your score is going to drop. Never exceed 30% of your limit.
  • Make sure your credit card companies are reporting your actual credit limit. If they are reporting a lower credit limit, then your calculation for 30% of your credit debt is going to be reported incorrectly, therefore damaging your score.
  • Be aware of the credit balance myth. Some people believe that they must keep an ongoing balance on their credit card in order to improve their credit score. This mistaken belief causes some consumers to make unnecessary interest payments. The truth of the matter is that credit bureaus have no way of knowing whether you pay your balance in full or make monthly payments. If you have the financial resources to do so, pay your balance each month. That said, keep your cards active. If you never use your credit card, it will become inactive and stop helping your credit score.

So if you need the credit cards, but credit card debt is also damaging, the question then remains: What exactly should you be spending your money on? How can you use your credit cards to build good credit?
To keep things in perspective, consider the following statement: wealth is creating a state of abundance. If you are using credit cards to pay for something, not only are you paying for the item, but you’re paying extra for the right to “pay later.” So instead of moving forward financially, you’re actually creating more debt. With this in mind, it’s important to examine exactly what you are using your credit cards for. Buying a shirt or even a tank of gas for your car at an inflated rate doesn’t really make any sense when you factor in interest. However, purchasing a book on finances or taking a course that will teach you a skill you can monetize will be well worth the extra interest you incurred.
Therefore, credit cards should be used to increase your quality of life or your wealth, not used as a means to create more debt. The next time you’re about to charge something, consider whether that purchase is going to create a state of abundance or create a state of debt. This type of control will not only help you improve your credit rating, but it will also help you make better long-term financial decisions.

The Retail Store Credit Card Scam

Posted on November 15, 2010 by - CREDIT BLOG, Credit Cards, CREDIT SCORING

Been hit up lately by sales clerks promising big savings if you apply for a retail store credit card?
Just about every major clothing, electronics, and department store offers a similar promotion: In exchange for applying for a retail store credit card, you will get a discount, coupons, or special offers reserved for cardholders.
But if you apply for a store-specific card, you will most certainly not save money. And you just might hurt your credit score, too.
Never Apply for a Retail Store Credit Card!
Let’s take a look at a typical interaction at a department store. Imagine that you walk to the cashier with your loot in hand—in this case, let’s say you are buying a shirt and a pair of socks for a total of $62.
The cashier immediately makes you an offer.
“Do you want to apply for a retail store credit card? You’ll save 15 percent on today’s purchases.”
Heck yes! you think, gung-ho to save $9.30.
But the cashier isn’t telling you a few pertinent pieces of information. Let’s take a look at two of the critical facts you should know before applying for a store-specific credit card.
Never Apply for a Retail Store Credit Card
Reason #1: You will pay more than you save.
Many stores promote their retail store credit card by offering a one-time discount on same-day purchases. But you will most certainly end up paying more than you saved. The banks and the retail stores promoting these store-specific credit cards are counting on you spending more money so that they can recoup that discount, and then some.
Consider all the ways the banks and the retail stores can make money off you:
1. If you are given a one-time offer to save on today’s purchase, you just might pile a few more items into your shopping card.
2. In the future, you will be more likely to engage in a little “retail therapy” if you have store-specific credit cards in your wallet.
3. You will be sent coupons and special offers that entice you to the store. Ever bought something just to take advantage of a coupon?
4. And, of course, you will pay interest and fees on the credit card.
Suddenly, that $9.30 savings doesn’t seem worth it, does it?
Never Apply for a Retail Store Credit Card
Reason #2: Your credit score might suffer.
I can think of three reasons your credit score might suffer from a store-specific credit card:
1. Keeping these cards active can be tough.
2. You might end up with too many credit cards.
3. You will definitely add a credit inquiry to your credit report.
Let’s start with the first reason: Keeping these cards active.
An important part of learning how to fix credit is to have the right number of credit cards. To earn the highest credit score, you should have between three and five revolving credit cards. And these credit cards should be active.
Credit-scoring bureaus want to know that you can responsibly manage your credit cards. If you let your credit cards go inactive, the bureaus have no idea whether you are able to manage balances and debt. In other words, inactive credit cards do nothing for your credit score.
But keeping a retail store credit card active can be tough. Are you going to buy a lawnmower from Sears each and every month? Are you sure you need a new Gap sweater twelve times a year?
Most likely, you will either keep the card active by making unnecessary purchases (which costs you money), or the card will go inactive. Either way, it’s bad news.
Let’s talk about the second reason a store-specific card might hurt your credit score.
Like I said, the credit-scoring bureaus are the happiest if you have the right number of credit cards. If you do not have at least three credit cards, they don’t have the information they need to make a judgment about whether you are responsible. If you have more than five credit cards, they know that you are in danger of getting in over your head.
Three to five is the sweet spot. So if you are limited to just three to five credit cards, why waste one on a card that will only be accepted by one merchant? You cannot reserve a car using your Banana Republic card, but you can purchase a suit from Banana Republic using a Visa.
Too often, people apply for retail cards each time they are offered a discount. These people must also carry American Express, MasterCard, and Visas for everyday expenses, traveling, and business needs. And they quickly find themselves carrying a lot more than five cards.
Finally, let’s talk about the third reason a retail card could hurt your credit score: credit inquiries. Ten percent of your credit score is based on the number of credit inquiries you have on your credit report in the past year. If you apply for a retail store credit card, your score could drop a few points, and this could cost you a lot of money in interest on future loans and credit cards.
Of course, department stores and banks will never tell you to avoid retail store credit card offers! Be sure to learn more of their secrets by downloading our free ebook: 35 Important Facts the Banks Won’t Tell You About Credit.

Secured Credit Cards: Avoid ‘em or Embrace ‘em?

Posted on November 3, 2010 by - CREDIT BLOG

In a lot of ways, secured credit cards sound like a raw deal. But if you have poor credit, secured credit cards might be your ticket to a great credit score.
Basically, secured credit cards—typically for people with bad credit—require you to pay a deposit that is equal to or greater than the limit before the card will be activated. Then, you can use the account as you would any other credit card. You would also pay the bill, just like you would any other credit card.
So, let’s imagine that you have a secured credit card with a limit of $500. Just to open the account, you would need to make a deposit of $500. Subsequently, you might charge $200 worth of stuff to the card.
Will the secured credit card company automatically apply the deposit to your balance? Nope—you need to pay the $200 bill, just as you would any other credit card. If you make payments, the balance will incur interest. And if you miss payments, the late payments will be reported to the credit-scoring bureaus, and your credit score will suffer, just as with a traditional (unsecured) credit card.
All the while, the bank holds onto your deposit. If you eventually default, the credit card company will keep your deposit, but only after they have turned you over to a collection agency and attempted to collect payment from you.
In short, secured credit cards require you to pay now, buy later, and then pay again, whereas traditional credit cards allow you to buy now, pay later.
If you make payments on time and learn how to build credit, you can eventually request that the secured credit card be transferred to a traditional credit card, at which point the bank will refund your deposit. The deposit will also be refunded if you close the credit card account, so long as you have no balance at the time.
Though secured credit cards might not seem like that great of a deal, they are necessary for two reasons. First, people with bad credit often cannot qualify for traditional credit cards, so secured credit cards allow them to build their credit scores (in this way, they are much like authorized users). Second, many businesses require that their customers have credit cards. For instance, most cell phone companies won’t give you a phone without a credit card—secured or otherwise.
As I mentioned, if you pay the bill on time and keep your utilization rate (the percentage of the balance held against the limit) under 30 percent, then a secured credit card will help your credit score just like any other credit card would. And as your credit card score begins to improve, you can contact the credit card company and ask if it can switch the card to unsecured.
While secured credit cards have high interest rates and force you to set aside a sizable amount of money as a deposit, they are an attractive way to rebuild your credit. Use them in the right way—with careful purchases and repaying your debt on time—and you’ll soon be back in the good graces of your credit card company.

The Magic of Authorized Users

Posted on November 3, 2010 by - CREDIT BLOG

One of my favorite ways to boost a person’s credit score is to teach them about the magic of authorized users. Authorized users are people who have permission to use other people’s credit cards. For instance, your husband might have a Citi card. His name, and his credit score, was used to apply for the account, but you have permission to use the account.
Becoming an authorized user is a powerful way to boost your credit score because you get to borrow the account holder’s good credit history. If you are an authorized user on a credit card in good standing, your credit score will reflect the credit card’s positive payment history by increasing. Beware, though: If you are an authorized user on a credit card in poor standing, your credit score will reflect the credit card’s negative payment history by dropping.
Keep in mind, however, that you must do three things to benefit from becoming an authorized user:

  1. Make sure that the credit card company reports your status as an authorized user to the credit bureaus.
  2. Protect yourself by finding the right account.
  3. Protect the account holder.

Let’s consider these one at a time.
Make sure that the credit card company reports your status as an authorized user to the credit bureaus.
In the past, people abused the power of authorized users, sometimes going so far as to buy authorized user status on a complete stranger’s account so that their credit scores would increase. The credit-scoring bureaus didn’t take too kindly to this, so they changed the rules. Now, they only consider authorized users if they are legitimately related to the account holder. In a best-case scenario, you would share a last name with the account holder, and you would live at the same address. At a minimum, make sure you are a relative of the account holder. Otherwise, the credit-scoring bureaus will not recognize your status as an authorized user, and your credit score will not improve.
Finally, make sure the account holder asks the credit card company if they report authorized users to the credit bureaus. Some do, but some do not. If the credit card company does not report your information to the bureaus, find another credit card.
Protect yourself by finding the right account.
As I mentioned earlier, your credit score could drop if you become an authorized user on a credit card that is not in good standing. The account to which you are added should have a credit card payment history that is clean. It should also have a credit card balance that never exceeds 30 percent of the credit limit. And if the account holder ever defaults on a payment or causes the balance to exceed the 30 percent threshold, remove your name immediately!
Protect the account holder.
It stands to reason that most authorized users have poor credit, or they would qualify for credit cards on their own. So it also stands to reason that your family members will probably be hesitant about giving you permission to use a credit card. What if you do a little retail therapy and then refuse to repay the debt?
Ensure the account holder that there are ways for you to benefit from authorized user status without actually being able to use the account. For instance, the account holder can shred the credit card that arrives for you, and they can refuse to give you access to the account number. In this way, you will benefit from the credit card’s positive history and create a layer of protection for the account holder.
As well, let the account holder know that your credit histories will not be merged. Your past credit mistakes will remain yours and yours alone. Only accounts that are shared will be reflect on each credit report.
When used correctly, authorized users can see their credit scores jump as many as 50 or 60 points just by being added to the right account. For this reason, we use authorized users to help people with credit repair after bankruptcy, foreclosure, or other financial meltdown.

Pre-Approved Card Credit Offers

Posted on November 3, 2010 by - CREDIT BLOG

If you are like most people, you have received several pre-approved card credit offers in the mail advertising low interest rates, an amazing new credit limit, or other special benefits. You might be wondering how these pre-approved card credit offers will impact your credit score and whether they are a good deal.
Keep in the mind the following points before you send away for these enticing credit offers.
The 1st Thing You Need to Know About Pre-Approved Card Credit Offers
Credit card companies usually obtain your information by paying credit-scoring bureaus (directly or through a marketing firm) to provide a list of consumers with the minimum credit standards for the card. If you are the recipient of one of these pre-approved offers, you may see the words “promotional” and “pre-approved” listed on your credit report. Some people may be swayed by the idea of being pre-approved, but a pre-approved credit card does not mean that you will even be guaranteed to obtain a card. The fine print likely tells you that final approval is determined by your application information.
The 2nd Thing You Need to Know About Pre-Approved Card Credit Offers
A pre-approved card sent to you will not affect your credit score. Credit inquiries made by credit card companies to determine your candidacy for pre-approved offers are considered “soft” and will not be included in your credit score. However, if you decide to sign up for one of these credit cards, you will be subjected to a real credit check, or a “hard” inquiry, and this will cause your credit score to take a slight dip as approximately 10 percent of your credit score consists of the number of hard inquiries you have listed on your credit report.
The 3rd Thing You Need to Know About Pre-Approved Card Credit Offers
Always read the fine print before you choose to open a pre-approved card. Though you may be persuaded by deals such as zero interest for a year on new purchases, the offers are rarely as straightforward as they seem. The language of some of the offers may not really match the reality of the credit card terms. For example, while an offer might boast “interest rates as low as two percent,” you might not fall into the category of people who receive this rate.
The 4th Thing You Need to Know About Pre-Approved Card Credit Offers
If you are considering applying for a loan to make a large purchase—such as a car—within the next year, you should probably avoid signing up for a new credit card. A new credit card can negatively affect your credit score in a few different ways. First, your credit score will decrease when the credit card company checks into your credit score. In addition, 15 percent of your credit score is determined by the age of your credit accounts, and old age means a better credit score. Opening a new credit account will drive down the average age of your credit accounts, reducing your credit score. Lastly, if you have too many credit cards, you may see your credit score drop.
The 5th Thing You Need to Know About Pre-Approved Card Credit Offers
Pre-approved credit cards may also put you at risk for identity theft. A common way for identity thieves to establish a credit account in your name is to intercept your mail and respond to a credit card offer in your name. As a result, your credit might be severely tarnished and worrying about excessive credit scores or too many credit checks will be the least of your troubles.
Because of this threat, the best way to deal with pre-approved credit cards could be to opt out from all offers. You can opt out by sending a letter to one of the three credit scoring bureaus and ask to be removed from their lists, or you can call (888) 567-8688 and ask to be removed from all credit card offers.
Either way, be sure you regularly review your credit report so you can protect yourself from identity theft.
A final note about pre-approved card credit offers: To find the right pre-approved card for your needs, your best bet is to search for a credit card yourself, trying to find the attractive offers on your own and shopping around for the best deal. Avoid signing up for the first offer you; instead, take a look at your other options. Just because something arrives at your door doesn’t mean you should put it in your wallet.

Ready to Transfer Credit Card Balances? Read This First!

Posted on November 3, 2010 by - CREDIT BLOG

Offers to transfer credit card balance to a low-interest card might be seductive. I’ll save money and lower my parents, you might think.
Not so fast! Before you transfer a credit card balance, be sure you understand how the process can benefit you or hurt your credit score. That’s right—it could hurt you.
Let’s take a look at how the process of transferring a balance from one credit card to another works. Traditionally, the process begins with a credit card with a large balance or a high interest rate. Once another card offers you an opportunity to transfer your balance to a new card with a lower rate, you may decide to put part or all of your balance on the new card. By doing this, you can pay off the old credit card, secure a new and better interest rate, and possibly enjoy the rewards, options, and specials associated with the new card. However, you should be mindful of two things before taking advantage of this seemingly smart strategy.
Transfer Credit Card Balances? Consideration #1: Pay attention to your credit card balances. It may seem like a straightforward idea to put all your balances on the card with the lowest interest rate, but keep in mind how credit-scoring bureaus come up with their ratings. Thirty percent of your overall credit score is produced by the balance you carry versus your credit limit, or your utilization rate. To keep a solid credit rating, your utilization rate should never be more than 30 percent of your limit. Many people rack up balances in excess of a 30 percent utilization rate after transferring money to new cards, and as a result, their credit score takes a big hit.
In fact, you should always wait until the card is opened to transfer credit card balance. Do not transfer the entirety of your balance while opening the account. Most creditors will decide your limit depending on the amount that you request to transfer. If you transfer $6,000, for instance, the creditor will determine credit limit to be $6,000, giving you a very dangerous utilization rate of 100 percent. The smarter way to proceed is to act cautiously: open the account first and transfer balances from other credit cards only after you know the limit and calculated the utilization rate. Then, only transfer 30 percent.
Transfer Credit Card Balances? Consideration #2: Never open a card just to transfer the balance. Having a ton of credit cards might lower your credit score as the credit bureaus know that you have the opportunity to dig yourself into massive debt and start missing payments. In a perfect world, you would have between three and five credit cards. If you already have five cards, don’t close them (this could also hurt your score), but don’t open new ones either, even if you think you’ll be saving money by transferring balances and lowering interest payments. In fact, you might end up lowering your credit score so much that you pay extra interest payments on all future loans. You should always make sure that all of your credit cards help with an overall credit-building strategy, so never open a card just so you can take advantage of a low introductory rate.
Once you have dodged these pitfalls, you might be ready to transfer credit card balance. As always, though, be sure to thoroughly read all the related fine-print associated with credit card offers. Some cards may have specific restrictions or fees associated with transfers. Making sure that you understand the extra benefits as well as restrictions of new cards could allow you to shrink your balances and perk up your credit score.

Credit Cards and Credit Scores: The Intimate Relationship

Posted on November 3, 2010 by - CREDIT BLOG

Many people wonder about the relationship between credit cards and credit scores. While credit cards can be great tools in enabling you to purchase goods and services without having the cash on hand, they can also present an almost irresistible temptation to spend money you don’t have and mess up your credit score. What you might not realize is that credit cards can be your secret weapon in obtaining an excellent credit score. By understanding the impact your credit cards have on your credit score, you can take charge of your credit cards and leverage this knowledge into a higher credit score.
Credit cards and credit scores go hand-in-hand in several ways. First, take a look at the number of credit cards you own. Credit-scoring bureaus reward consumers the most if they can manage to responsibly balance between three and five credit cards. Credit card companies want to see that you can manage more than one or two credit cards at the same time, so if you have only a couple of cards, you may get a boost by obtaining an extra card or two.
Warning, if you have more than five credit cards, you shouldn’t immediately cancel a bunch of cards. First, this may damage your credit score by reducing the average age of your credit accounts. The length of your credit accounts determines fifteen percent of your credit score, so closing two or three credit card accounts may cause your credit score to drop. Second, you may be able to maintain and increase your credit score even with more five credit cards if you can pay down your balances to as close to zero as possible on any credit cards you rarely use.
Another important part of understanding credit cards and credit scores is the utilization rate. To get the best credit score, you should maintain a utilization rate of 30 percent or less. Your utilization rate is the ratio of your credit card balances against your credit card limits, expressed as a percentage. Therefore, if you have $600 worth of debt and your credit limit stands at $1,000, your utilization rate is 60 percent. Credit-scoring companies will award you a higher credit score with a sub-30 percent utilization rate, so if you can pay down your debt below this threshold, you will likely see a quick boost to your score.
Another way to strengthen the relationship between your credit cards and credit scores is review your credit report. Make sure you are regularly reviewing your credit report to keep track of whether your credit limits have been accurately reported.
If your credit card company reports your limit as $2,000 instead of $4,000, the $1000 balance on your card goes from being an attractive utilization rate to a negative factor that will drag down your credit score. In other words, rather than showing a 25 percent utilization rate, your credit card will show a 50 percent utilization rate. Unfortunately, credit limits are frequently misreported, so this should a mandatory item for you to double-check when you are reviewing your credit report.
One of the advantages of keeping on top of your credit cards and credit scores is being able to save money. Once you’ve built your credit score by using your credit cards wisely, you can flex your financial muscles. Call your credit card companies, point to your steady and responsible behavior, and ask for a lower interest rate.

A Dirty Little Secret that Hurts Credit

Posted on November 3, 2010 by - CREDIT BLOG

People already know that bankruptcies, foreclosures, repossessions, and collections will hurt credit. And it’s no big secret that late payments are one of the causes of bad credit.
But I bet you don’t know about some of the things that hurt credit! Today’s blog is about the the dirty little secret that will hurt your credit score.
HURT CREDIT SECRET #1: Credit card companies often omit or inaccurately report credit card limits, and this causes your score to drop. About half of all consumers are missing at least one credit limit on their credit reports. And in other instances, credit card companies intentionally report a lower limit than you have.
Why does this hurt credit?
The credit-scoring systems place a lot of weight on something called a utilization rate. The utilization rate represents your credit card balance as a percentage of your limit. If your limit is $1000 and your balance is $300, you have a 30 percent utilization rate. If your balance increases to $500, your utilization rate would increase to 50 percent. In other words, you would be utilizing 50 percent of your available limit.
The credit-scoring formula responds more favorably to people who have a utilization rate that is no higher than 30 percent.
Now let’s imagine that you have a $300 balance on a credit card with a limit of $1000. Your utilization rate is 30 percent. Good news for your credit score, right?
Not so fast. If the credit card company is only reporting a $500 limit, you will appear to be carrying a 60 percent utilization rate. And this hurts your credit score.
There are a lot of theories as to why the credit card companies do this. One is that credit card companies buy lists of borrowers whose limits are, for example, more than $10,000. The companies then send credit card offers with enticing interest rates to the people on these lists. Their goal is to encourage borrowers to switch cards.
Your credit card company does not want your name on that list. They want to make sure that you remain a loyal customer. In an effort to keep you as a client, some experts say credit card companies report a lower credit limit than you actually have, or they do not report your limit at all.
This makes you less appealing to other credit card companies.
This might be good news for their client list, but it causes hurt credit.
Are you a victim of this scam? If so, take the following steps:
1. Pull your credit report from www.720ficoscore.com.
2. If the credit card companies are inaccurately reporting any credit limit of yours, immediately begin the process of correcting this mistake.

Closing Credit Card Accounts

Posted on April 5, 2010 by - CREDIT BLOG, CREDIT SCORING

As part of your plan for learning how to build credit, you might wonder if you should start closing credit card accounts. After all, if you have more than five credit cards, you have more than the ideal number.
True, credit scoring systems are happiest if you have no more than five credit cards. But before you make that call to the credit card company, be aware that closing credit card accounts can have a major impact on your credit score. Keep in mind a few basics about owning credit cards.
Fifteen percent of your credit score is derived from the age of your credit accounts, with older credit accounts giving you a better score. This part of your credit score is based on the average age of your accounts. As a result, every time you terminate older accounts, you drive down the average age of your accounts considerably and risk decreasing your credit score.
You should also consider how closing credit card accounts will affect the portion of your credit score that considers your credit card limits and balances. Your “utilization rate” is the ratio of your credit card balance against your credit limit, expressed as a percentage. If you have $800 of debts on a credit card and your available line of credit is $2,000, your utilization rate is 40 percent. Since credit-scoring bureaus reward people who have utilization rates below 30 percent, you should try to always keep your utilization rate under that threshold.
Closing credit card accounts can impact your utilization rate in a couple of ways. First, if you decide to cancel a credit card and transfer the remaining debt to another card, you may cause the utilization rate on the second card to rise sharply, which will cause your credit score to drop. Even worse than transferring a balance is leaving a balance on your card after canceling the account. If you leave a $700 balance on the canceled card, your utilization rate will suffer dramatically since the limit on the card will be $0.
So what is the plan for dealing with a bunch of credit cards? Even FICO agrees that closing credit card accounts is a bad idea. Your best bet is to keep all of them active but pay them off every month. You can even find ways to live debt-free and keep your credit cards active. A steady history of payments will demonstrate to credit-scoring bureaus your ability to manage your accounts and will eventually improve your credit score. Pay special attention to the cards with the highest limits, oldest ages, and best interest rates. Be sure to keep these cards active, maintaining a utilization rate below 30 percent.
A final note: Retail credit cards (those associated with a specific store, such as Bloomingdales) are an exception to the “keep-them-open” rule. Keeping a balance on these cards may be difficult since you probably do not need to buy something from these stores each month. Letting a retail account go inactive may not be the ideal choice, but it should not be a cause for alarm unless it causes your credit score to drop, in which case you might be able to reactivate the card with a simple phone call.