Financial Planning

Consumer Credit

If you have a credit card, you’re not alone. In fact, most people have at least one. Credit can be a very good thing; most of us can’t purchase a car, home or other big-ticket item without it. Maintaining a solid credit rating and payment history will ensure your ability to obtain credit in the future. If you don’t have a credit history, how do you get one?

Build A (Good) Credit History

If you haven’t financed a major purchase, how do you establish credit? If you’re at least 18 years old and have a regular source of income, you’re well on your way to qualifying for credit. However, you must demonstrate that you’re a good risk before lenders will extend credit to you. Establishing a favorable credit history is one of the smartest financial moves you can make.

If you’re unable to qualify for a credit card from a major credit card issuer, consider the following alternatives to establish a credit rating:

• apply for a credit card issued by a local store. Often, local businesses are more willing to extend credit to someone with no credit history.
• apply for a secured credit card. Basically, this type of card requires you to save the money first as collateral for your line of credit. Your credit line will be a percentage of your deposit, typically from 50 to 100 percent of your account balance. Bear in mind that some secured credit cards charge application and processing fees, and many carry a higher interest rate than traditional, non-secured cards.
• ask someone with an established credit history – perhaps a relative - to co-sign your credit account. By co-signing, this individual commits to repay the loan if you don’t.

Once you demonstrate that you’re a responsible credit manager by paying your bill on time and in full, major credit card issuers may be more willing to extend credit to you.

Choose the Right Card

Often, consumers choose a credit card in response to clever marketing. For example, a creditor may offer you free stuff and a low “introductory” interest rate. Unfortunately, that low interest rate will go up after a certain period of time, and you’ll pay more for credit you’ve already used. You may also be charged penalty fees if you haven’t fully paid for purchases made during the introductory period.

For the best deal, choose a credit card:

• that doesn’t charge an annual fee;
• that offers a low fixed interest rate; and
• that provides a clear explanation of fees for late payments and courtesy services, such as cash advances and balance transfers.

You can compare credit card interest rates online through a variety of websites, including www.bankrate.com, www.creditcards.com and www.cardratings.com.

If you already have a credit card and you want a better interest rate, ask your creditor to match lower rates offered by other credit card companies. To keep your business, your creditor may be willing to lower your rate.

If you're not sure how to ask for a lower rate, try this sample script to start the conversation:

Hi, my name is Jane. I’ve been a customer for three years and other credit card companies are offering lower APRs. Unless you can lower the interest rate on my card, I’ll have to close my account and switch companies. What can you do for me?

If you have a solid payment history, chances are the creditor will honor your request and knock off as many points as possible. If you aren’t making headway with an account representative, ask to speak to a manager. If the creditor simply won’t budge, take these simple steps:

• close your account and pay any remaining balance;
• cut up the credit card; and
• apply for a card with a lower interest rate.

Pay Close Attention

Read the fine print on your credit card agreement very carefully. Credit terms change, so pay attention to your monthly statements and call your creditor immediately if you have questions or concerns. Also, check in with your credit card company now and then to make sure you’re paying the lowest possible interest rate. If you make your payments on time and manage your credit responsibly, you may qualify for a lower rate.

It's also important to monitor your credit history on a regular basis by contacting the major consumer reporting agencies for a copy of your credit report.

• Annual Credit Report Service: 877-322-8228 (www.annualcreditreport.com)
• Equifax: 800-685-1111 (www.equifax.com)
• Experian: 888-397-3742 (www.experian.com)
• Trans Union: 800-888-4213 (www.transunion.com)

The Annual Credit Report Service will provide one free copy of your credit report per year as required by the Fair Credit Reporting Act. Equifax, Experian and Trans Union will provide additional copies of your credit report and your credit score for a small fee. Instructions for ordering your report and addressing any errors are available online.

Maintain Your Credit History

Once you’ve developed a favorable credit history, it’s important to maintain it by learning what affects your credit most …your credit score.

Your credit score, also known as a FICO score, is the measure lenders use to determine the likelihood that you'll repay money you borrow. Scores range from 300-850; a higher score means lower interest rates.

What’s your FICO score based on? Your "magic number" reflects five general categories:

• Payment history, 35%
• Amount owed, 30%
• Length of credit history, 15%
• New credit, 10%
• Types of credit used, 10%

Want to know the best way to maintain or boost your score? Pay your bills on time and in full, don’t use all the credit that's available to you and limit new lines of credit. For more information about FICO scores, visit www.myfico.com.

Want to know more?

Read more about consumer credit issues in the following documents:

• Choosing When to Use a Credit Card [doc]
• Credit Card Repayment [doc]
• Excessive Credit Card Debt [doc]
• Debt Snowball: Step-By-Step [pdf]
• Scams and Schemes [doc]