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Ready, Set... Credit
April 1999
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. 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 credit 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 national credit bureaus are:
EQUIFAX
PO Box 740241
Atlanta, GA 30374-0241
(800) 685-1111 |
EXPERIAN (formerly TRW)
PO Box 949
Allen, TX 75002
(888) EXPERIAN (397-3742) |
TRANS UNION
PO Box 390
Springfield, PA 19064
(800) 916-8800 |
Anyone who takes action against you in response to a report supplied by
a credit reporting agency — such as denying your application for credit — must
give you the name, address and telephone number of the credit bureau that provided the
report.
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? First, consider applying for a
credit card issued by 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
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.
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. For example, if
you have an outstanding balance of $2,000, with 18.5% 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.
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 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 billing error notice. You do not have to
pay the amount in question 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.
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.
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