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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

The credit card habits that save you money also happen to keep your rates from rising and your credit limits from falling. Thank the big guy for small favors.

The best way to protect against negative changes to your account is to "make sure you don't spend what you don't have, you don't carry a balance, you pay bills on time," says Ethan Ewing, president of Bills.com in San Mateo, Calif. "As long as you do those things, you're not going to find yourself in a situation where issuers are raising rates or changing terms or at least not in a situation where it's going to affect you negatively."

After July 2010, consumers will have some protection from issuers arbitrarily changing terms. Though they use the phrase "market conditions" in the credit card agreement to defend their actions, it feels rather arbitrary to consumers.

Until 2010, the card companies have the right to do pretty much anything they want, so consumers must continue to tread carefully lest they end up paying 30 percent interest on long-held balances.

Live by the following strategies to build a great credit score without drowning in fees, debt and finance charges. We'll explain what to do if an issuer still treats you wrong.

12 steps to credit card success

1. When getting a new card, think long-term
Taking on a new credit card should be like shopping for quality furniture. Look for a card you could stand to keep for years. Try not to accumulate store cards, because they usually have low credit limits and high interest rates. A few pairs of shoes on a retail credit card and your balance can look high relative to your credit limit, bringing down your credit score. Balances owed comprise 30 percent of your FICO credit score.

Don't let prescreened offers that promise attractive interest rates and terms dazzle you. "Just because you get a prescreened offer doesn't mean you are eligible for that credit offer as well," says Mindy A. Bockstein, chairperson and executive director of the New York State Consumer Protection Board.

The issuer reserves the right to check your credit before approving your application. You could get denied credit or receive a card with a different interest rate altogether.

Limit your potential for identity theft by opting out of prescreened offers. When you're ready for a new card, use our credit card comparison tool to shop for a card based on your credit profile.

Gauge your credit scores for free by using our FICO Score Estimator.

If you're looking for a credit card that offers cash back for your purchases, see Bankrate's exclusive study on cash-back rewards cards.

2. Scrutinize terms and conditions
Never apply for a card without reading the terms and conditions of the card. This gives you the chance to find out about fees and anti-consumer policies. Common ways a card can dip into your wallet include annual fees, late fees, cash advance fees, overlimit fees and balance transfer fees.

Consider how you would use the card and how many of the fees would apply to you. For instance, if there's a fee to pay by phone, think about how often you've made last-minute payments or called to pay because you were traveling.

Read the fine print to figure out what triggers the default rate. Watch out if the issuer practices universal default, meaning that if paying late to any other creditor your annual percentage rate, or APR, could jump to the default rate. If the issuer can increase your rate based on your credit history, that's another way of saying your rate could rise based on delinquencies with unrelated lenders.

Included in the rules adopted Dec. 18, is the prohibition on increasing interest rates on current balances. The universal default wasn't killed entirely - issuers will still be able to jack up rates on future purchases based on changes in your credit report.

Obviously, consumers must always pay attention to the interest rates for purchases, cash advances and balance transfers.

Experts say it's a good idea to have two major credit cards -- one you pay off every month, preferably with rewards, and one with a low interest rate for big-ticket items or emergencies. If you wind up with more then two cards, the extra credit limits can help your credit scores, but only if you keep your balances low. A component in the FICO scoring model penalizes consumers for having balances on too many cards, so try to not to use all of them at once.

-- Posted: Aug. 27, 2008
 
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