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.
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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