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Step-by-step guide to credit cards

From making big purchases to buying new jeans, credit cards can make your life much easier. But if you're not careful, they can bite you in your Levis' 501s!

Read Bankrate's helpful credit card guide before you shout "Charge!" We'll lead you step-by-step through this most dangerous of card games.

Step one: Do you really want that card?

Is that credit card application burning a hole in your pocket? Whether it's your first or fifth, applying for a new credit card is a serious financial decision. If used and managed wisely, a credit card can be a great financial tool. Convenience and consumer protection are just a few of the perks that accompany credit cards. However, if you're not careful, a credit card can land you in a pool of debt and even damage your credit history.

How do you decide if you really need a new credit card? As with all financial decisions, you must carefully weigh the pros and cons before you sign on the dotted line. You must also ask yourself, "Why do I want a new card?" If this is your first credit card you might be trying to build a credit history, or perhaps you just want a card for emergencies.

But what if you're applying for a third or fourth card? Why do you need the additional credit? Answer yourself honestly because overextending yourself financially can have disastrous consequences. If you've answered the questions and you're satisfied with your answers, it's time to take a look at the pros and cons of obtaining a credit card.


If you're not a credit card veteran, perhaps you're wondering what benefits the plastic can bring your way. Here are some answers:

  • For starters, you can avoid carrying wads of cash when you have a credit card on hand. No cash in your banking account? No problem, you can take a loan from your credit card. A loan? Yes, you "borrow" from your credit card. Most credit cards give you a grace period of 25 days to pay off your balance before you're charged interest.

  • Using a credit card can also help you build a credit history. Even if you only use your card a few times, your name and credit behavior will be reported to one of the national credit bureaus. Why is this important? If you ever plan on purchasing a home, car or insurance or even applying for a new job, your credit history will likely be a part of your application. In addition, a credit card can serve as identification for merchants -- even if you don't use it to make a purchase.

  • Federal and state laws also provide added protection when you make a purchase with a credit card.  Some card issuers offer compensation on damaged or stolen goods purchased with their card. If you follow the rules you can even get a purchase deleted from your bill despite a merchant's refusal to take it back.


All of these benefits have you ready to give the credit card company your John Hancock!  Not so fast, there's a flip side to owning a credit card.

  • Some consumers make the mistake of thinking that a line of credit is equivalent to cash in the bank.  Sometimes, a credit card can make buying that new high-tech CD player a little too easy. Oops! Suddenly, you're in deep debt.

  • If you start to accumulate large balances on your card, you could wind up becoming a slave to your plastic. A maxed-out credit line and extenuating debt could make it difficult or even impossible for you to make large purchases such as a house or automobile.

  • A balance on your card can buy you more than you bargained for down the road. The interest rate on your card is not set-in-stone. It could shoot from 5 percent up to as much as 30 percent with little warning. Not a big deal if you don't carry a balance, but a huge problem if you just purchased a $3,000 couch that you can't pay off right away.

  • Credit cards also open your door to scam artists. If you're not careful with your card and number, you could end up with charges you didn't authorize. Let's say one day you pump gas and use your credit card to pay. You drive off and forget to take your receipt. The next thing you know the Home Shopping Network has $2,000 in products charged to your card. Fortunately, Federal law limits a cardholder's responsibility in cases of credit card fraud to $50 max -- you just have to prove it.

These are only a few credit card facts to consider. Before making a decision, create a list of your own pros and cons. If you decide you need or want a credit card, remember that the key to becoming a successful credit card user depends on your ability to use the positive features of the card.  For those who can responsibly manage credit card spending, a credit card can be a great asset. But, before you put that application in the mail, you'll want to take a look at Step two.

Step two: Your credit history counts.

You want it, you need it, but you're not sure if you can get it.  In addition to employment and income, your ability to obtain credit depends on previous credit behavior and the way lenders score your credit rating.  Your financial habits -- good and bad -- are tracked by creditors and reported to the national credit bureaus.

One false move in debt payment and you could end up with black marks on your credit report.  Who's counting those marks? According to the Fair Credit Reporting Act, credit grantors, collection agencies, insurance companies and employers can all obtain a copy of your credit report.

If you're thinking "Hey, I pay everything on time, I'm in the clear for sure," you're wrong.  Mistakes happen, and a mistake on your credit report could cost you big.  Unless you find the problem first and get it resolved, a lender could deny you credit for something you didn't even do.

So before you apply for a credit card, loan or major purchase, you should obtain a copy of your credit rap sheet. The three major national credit bureaus are Equifax, Experian (formerly TRW) and TransUnion. For an $9 fee in most states you can order a copy of your credit report.  If you've been denied a loan or credit in the last 60 days you may be eligible for a free copy.

Make sure all of the personal information and financial transactions are correct.   What if you find mistakes? Make photocopies of any documentation that supports your claim. Write a letter to the credit bureau stating what is wrong, and send it certified mail with a return receipt. If your name is mixed up with someone else's, include a copy of your birth certificate. The credit bureau is required by law to respond within 30 days. Make sure you resolve all discrepancies before you send out your credit card application.

If you've been denied credit in the past, or your credit history is weak, see Bankrate.com section on No Credit/Bad Credit.   We'll tell you how to get first-time credit, clean up your credit history and get back to good standings.

When you've got a clean credit rap sheet, you're ready to apply for a credit card. But, don't jump at the first offer that hits your mailbox.  It's time to shop around, so read on.

Step three: Look for the best deal.

You price and compare laundry detergent, toilet paper and antacid tablets. As a good consumer, you of course pick the best deal to fit your needs. Should you treat credit cards any differently? No way! You want the card that benefits you the most and costs you the least.

How do you find the best deal? Well you can't exactly compare price tags, but you can compare the APR, annual fees and grace periods. Just like a bargain at the grocery store, the right credit card -- once you find it -- can save you money.

Annual percentage rates

So what do all of these credit card terms amount to? According to the Federal Trade Commission the annual percentage rate is a measure of the cost of credit, expressed as a yearly rate. This number is disclosed to you when you apply for a card, again when you open the account, and noted on each bill you receive.  The card issuer also must disclose the "periodic rate" -- that is, the rate the card issuer applies to your outstanding account balance to figure the finance charge for each billing period.

Annual fees? Its not like you're joining a club, is it? Well, kind of. An annual fee is a flat fee, similar to a membership fee, for the use of your card. Most bank cards do not charge annual membership fees. However, charge cards such as American Express that do not charge interest often require an annual fee.

When you borrow money from your credit card, the loan may be free for a period.   Why? Credit issuers offer a grace period or time during which you can pay your credit card balance without accruing interest. How long will your loan be free? That varies with every credit card, but 25 days is the most common grace period. For most credit cards this period only applies if you pay off your balance in full. Interest will accrue on any balance remaining at the end of the grace period. This grace period usually does not apply to cash advances, which in most cases have no grace period.

Schumer's Box

You don't have to be Sherlock Holmes to locate the facts about a credit card. You only need to find the portion of your solicitation that's referred to as the "Schumer's Box," named after Charles Schumer, the New York congressman responsible for legislation that created this special box with fine print. The Schumer's Box gives the most important information on the pricing of the credit card offer. Often, promises of no annual fees or low credit card rates have limitations. If so, the Schumer's Box portion of your solicitation should say so.

So you busted out the magnifying glass and found the APRs, annual fees and grace periods. You've got numbers, but how do you know which card is best for you? You have to look at your monthly payment habits. Do you pay your balance in full every month, or do you make a smaller payment and leave a balance on your card?

If you're someone who pays off your balance each month, you should select a credit card that has no annual fee. It won't matter what APR the card has because you pay your balance and no interest will accrue. Just make sure you make your payment before the grace period is up!

Not so quick at paying off the debt? If you're a "revolver," someone who doesn't pay off their balance each month, you'll want to take a closer look at that APR. A low interest rate card is probably your best bet. However, the method of balance computation and the grace period will also affect your costs.

CC checklist

So spread out all of those credit card offers and compare their APRs, annual fees and grace periods. Make certain the solicitation has been issued by a bank, thrift or credit union. There have been a number of scam artists whose solicitations resemble those of bank cards.

Whittle down your list, and pick the card that best matches your needs. Sign on the dotted line, mail off your application and you're on your way. But before you start charging up, read the next section on managing credit card debt.

Step four: Manage your debt.

You've got the power -- you've got a credit card. Like the heroes and villains of Metropolis, you must decide to use your power for good or evil. The decision should be an easy one because using your card responsibly is the only way you'll get to hang on to it.

Knowing your credit limit is key to keeping yourself out of financial hot water. Decide how much debt can you afford. You can determine your credit limit by looking at your income, current debt and credit history. Your monthly debt should not exceed 36 percent of your monthly income. Using your credit cards wisely will help you keep your debt within manageable limits.

Your credit behavior is tracked by lenders and reported to national credit bureaus to create a credit history. That's why it's important for you to develop good habits with credit cards and avoid the bad ones.

If you pay your monthly card balances in full, we tip our hats to you. If you don't, make sure you don't get caught in a rut of paying minimum fees on your card. Most cards allow you to pay the minimum balance each month and finance the rest.  Why? That's how the card issuers make a profit.

Double your trouble

Paying only your minimum card balance will result in a much larger debt than your purchases were worth. Let's say your balance on an 18 percent card is $3,000 and that each month you make the minimum payment of 2 percent on the balance, with a $10 minimum. It will take you 36 years and two months to pay off the card. The total interest you'll pay on the $3,000 will be a staggering $7,587!

Other pitfalls to avoid are late payments and "skip" payments. You should pay against your balance as soon as you can, and always pay at least the minimum balance by your payment due date. In addition to interest charges, credit card issuers also assess late fees that are usually 2 percent of your outstanding balance. And when you make a late payment a negative rating hits your credit file. If you're unable to make your payments on time, or want to dispute a charge, contact your card issuer immediately and get everything in writing.

If your lender suggests you should "skip a monthly payment," a strategy many lenders use around the holiday season, don't do it.  The interest clock will keep clicking on that higher balance you've accumulated.

Cash advance? Think again.

Cash advances are another credit card no-no. Watch out for those enticing checks lenders are sending because you are such a good credit risk. If you fill them out, many zap you not only with a higher cash advance rate, but you also could pay a transaction fee. Also keep in mind that cash advances often have no grace period and start accumulating interest on day one!

It's easy once you have your credit card to become complacent. But it's important to monitor your monthly billing statements carefully. Most card issuers review their pricing periodically and notify you of changes only in flyspeck type on a note that comes with your bill. So double-check the rates and fees you're now paying on your cards. It's important to avoid getting into so much debt that you can't afford to move when you get zapped with an unfavorable change on your card. Also check to see if the card's annual fee has been raised. The max you should pay is $35.

Make the move

What can you do when your interest skyrockets? Shop for a better deal. It's easier than you think because card issuers are anxious for your business -- in fact, they'll even give you a card if you've had bad credit or no credit at all. Forget any feelings of loyalty to your present card issuers. You don't owe them any.

If you truly like the card you have, ask them to lower your interest rate. Tell them you've got an offer for a much lower rate and you'll have to transfer your balance if they can't cut you a deal. However, you should be prepared to do so if they refuse your ultimatum.

You can transfer the balance on a card by simply filling out the paperwork provided by your new card issuer. After you transfer a balance, cancel your old card. You shouldn't carry more cards than you need. Creditors look at how much you're able to go into debt when they review your record. In addition, don't apply for more than one card at a time. Creditors consider that a negative.


What should you do if you run into severe financial problems?  Contact one of the personal-credit counseling organizations, such as Consumer Credit Counseling Services at (800) 388-CCCS. They've helped millions of people and can probably help you at no charge or for a small fee.

Understand that a bad credit record will haunt you for years. Your card payment record reflects all your habits -- the good, the bad and the ugly -- so it's important to stay on top of your payments to keep up a healthy credit file.

Step five: Use your credit card as a consumer safety net.

Looking for more consumer protection on your purchases? A credit card might be the way to go. Using a credit card offers additional legal protection that you won't get if you make a purchase with cash.

What happens if you overpay at the register using cash and don' t notice the missing money until you get home? Chances are you're out of luck. However, if you overpay or discover a mistake on your credit card bill, you have a chance to get your money back. You have the right to dispute a billing error or unauthorized charge. Federal law provides specific guidelines that the card issuer must follow to correct billing errors.

To dispute an error, you should notify the issuer within 60 days of the date the error shows up on your bill. Include your name, account number, a description of the error and why it is wrong.

Send photocopies of any supporting documentation. It's a good idea to send the letter by certified mail with a return receipt. While the item is in dispute, you don't have to pay the charge. The card issuer must acknowledge your letter within 30 days of receiving it and resolve the situation within 90 days. The issuer is required either to correct the error and credit your account or send an explanation of why the charge is correct. If it is correct, you'll have to pay it, and possibly also pay retroactive interest on the item as well.

If you're dissatisfied with an item purchased on a credit card, the rules are a bit different. Provided that you already have made an effort to resolve the dispute with the merchant and have not yet paid the item off, you have the right to dispute the charge. However, the purchase must be greater than $50, and the merchant must be in the same state or within 100 miles of your address. What happens when you pay cash? Unless you're headed to small claims court, you're stuck with your purchase.

That's not all your credit card can do for you. Let's say your wallet gets stolen. Unless your thief has a change of heart, you can kiss your cash adios. However, if your card is stolen or used without your authorization, the most you are liable for by law is $50. If you report the card stolen before any purchases are made, you are not responsible for any charges.

Most card issuers have a 24-hour, toll-free number to call in the event of a stolen card. The Federal Trade Commission also adds, "For your own protection, you should follow up your phone call with a letter to the card issuer." Include your name, account number, when your card was found missing and the date that you reported to the issuer the card was missing.

Provided you manage your credit card spending responsibly, using your credit card can be a consumer safety net.

Step six: If you can't get a card ...

If you've flunked the credit scoring test and been rejected for a credit card at one institution, don't despair. There could be other lenders with different criteria and some that will give you a secured credit card.

Your first step upon rejection is to exercise an important right available to you under the Truth in Lending Act: Find out why you were rejected. If you were rejected because of information supplied by a credit bureau, get the name and address of the credit bureau. Under the Fair Credit Reporting Act, you may not be charged for a copy of your credit report if you request one in writing within 30 days after being rejected for a credit card.

Examine the report, and check for errors. Find a mistake? Make photocopies of any records that might document your case, and include them in a letter to the credit bureau explaining why the information is wrong. When you apply for another card, provide the letter as evidence that the item is under dispute. By law, the credit report should be fixed for free, and the problem should be resolved in a reasonable length of time, which generally is considered 30 days.

If there is no error, and you simply can't qualify for the card, consider other options that can strengthen your credit file. Joining a credit union could make you eligible for a union issued card. Often credit unions are more lenient toward members they already know.

Another option is a secured credit card. With a secured card, you secure your credit card by depositing money, generally equal to the amount of your credit line, in a savings account or CD. However, your card issuer maintains a lien on the deposit account, which you stand to lose if you fail to make timely payments.

In considering a secured card, try to avoid steep application and annual fees and unusually high interest rates. Also, make certain you are getting a fair savings account rate for the amount of time you plan to be tying up your money. It's important to find out when your card issuer plans to re-examine your account to determine whether you qualify for an unsecured credit line. It should not be longer than 18 months after you apply.

Because more banks than ever are offering secured credit cards, it pays to shop around.

If you think you have a low score because you have not established a credit history, take a few steps to build it up. Apply for a department store card or gasoline credit card, which are relatively easy to qualify for, and pay your bills on time. You can also take out a secured credit card by depositing money with the issuing bank.

If, however, your credit score is low because your debts are out of hand, the worst step you can take is to ignore them. The sooner you deal with credit problems by discussing them with your lenders, the more lenient and less painful your exit from debt will be.

Posted: May 21, 1998


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