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Get smart about credit
Credit card issuers have been calling the shots for years. Follow these rules to beat them at their own game.
Smart borrowing

How to be a savvy credit cardholder

Explore the frugal tips on Bankrate.com for ways to free up money to pay down debt.

6. Know thy limit
When you max out a card, you hurt yourself in numerous ways. Your credit score will take a hit. Going over the limit typically results in an overlimit fee, and that could trigger the default rate.

Keep a running tab of your purchases and stop at the 30 percent utilization mark. For example, if your card has a $2,000 limit, try not to charge more than $600.

7. Keep your cards manageable
Don't carry more credit cards than you can handle. Ideally, you don't want to close cards because those extra credit limits help cushion your credit score if those cards don't have balances on them. If having more than two cards tempts you to spend, however, or if managing more than two accounts gets too complicated, keep things simple and close an account. If you're within six months of applying for a major loan, however, hold off on closing a card. Bankrate's story, "Closing credit cards dings credit score," explains what you need to know about canceling accounts.

If you have cards you seldom use but want to keep them open for the sake of your credit scores, use them every six months to keep them active. Buy something inexpensive and pay it off.

8. Understand how payments are applied
Interest rates are often different for cash advances, balance transfers and purchases. Issuers will often state in the contract that they reserve the right to apply payments to lower-rate balances first before higher ones. When you take out a cash advance, for example, payments you make would apply to your purchases first, because the rate on that balance is typically lower than on cash advances.

The average cash advance rate is currently 14.55 percent for fixed-rate cards and 14.82 percent for variable-rate cards. Average purchase rates stand at 11.78 percent for fixed-rate cards and 11.31 percent for variable-rate cards.

Good news for consumers: the rules adopted Dec. 18 will do away with this practice.

After July 2010, there will be no more pro-issuer payment allocations. When an account has multiple balances at different interest rates, any money paid over the minimum must be applied either to the balance charged the highest rate or equally to all balances. This change helps consumers with multiple balances -- due to balance transfers, cash advances and new purchases -- save money in finance charges when they pay down balances.

9. Check your credit report and score
Make sure your on-time payments are reported by checking your credit reports, says Steven R. Katz, director of consumer education for TransUnion's TrueCredit.com.

You can do this three times a year for free, by going to www.AnnualCreditReport.com and pulling a report from a different credit-reporting agency every four months. Residents of Colorado, Maine, Maryland, Massachusetts, New Jersey and Vermont can get an additional free credit report from each bureau, and Georgians can get two additional credit reports by contacting Equifax, Experian and TransUnion.

Dispute any errors on your credit report. Getting inaccurate derogatory items off your report can boost your credit score.

-- Posted: Aug. 27, 2008
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