A credit card
is a great financial tool. It can be more convenient to use and carry than
cash and it offers valuable consumer protections under federal law.
At the same time, it’s a big responsibility. If you don’t use it
carefully, you may owe more than you can repay, damage your credit rating,
and create credit problems for yourself that can be difficult to fix.
Chances are your mail is full of offers from credit card issuers. How
do you know if the time is right for a credit card? Here is some important
information that may help you determine whether you’re ready for plastic,
what to look for when you select a company to do business with, and how to
use your credit card responsibly.
a Credit Card
If you’re at least 18 years old and
have a regular source of income, you’re well on your way to qualifying for
a card. But despite the invitations from card issuers, you’ll still have
to demonstrate that you’re a good risk before they grant you credit. The
proof is in your credit record. If you’ve financed a car loan or other
purchase, you probably have a record at a credit reporting bureau. This
credit history shows how responsible you’ve been in paying your bills and
helps the credit card issuer decide how much credit to extend.
Before you submit a credit application, get a copy of your credit
report to make sure it’s accurate. Contact the credit bureaus listed in
the telephone directory under "credit" or "credit rating and reporting."
Because more than one credit bureau may have a file on you, call each
until you locate all the agencies maintaining your file. The three major
national credit bureaus are:
Atlanta, GA 30374-0241
PO Box 2002
Allen, TX 75002
Chester, PA 19022
Anyone who takes action against you in response to a report supplied by
a credit reporting agency — such as denying your application for credit —
must give you the name, address and telephone number of the credit bureau
that provided the report.
Suppose you haven’t financed a car
loan, a computer, or some other major purchase. How do you begin to
establish credit? First, consider applying for a credit card issued by a
local store and use it responsibly. Ask if they report to a credit bureau.
If they do — and if you pay your bills on time — you’ll establish a good
Second, consider a secured credit card. It requires that you open and
maintain a bank account or other asset account at a financial institution
as security for your line of credit. Your credit line will be a percentage
of your deposit, typically from 50 to 100 percent. Application and
processing fees are not uncommon for secured credit cards. In addition,
secured credit cards usually carry higher interest rates than traditional
Third, consider asking someone with an established credit history —
perhaps a relative — to co-sign the account if you don’t qualify for
credit on your own. The co-signer promises to pay your debts if you don’t.
You’ll want to repay any debt promptly so you can build a credit history
and apply for credit in the future on your own.
A positive credit history is an asset, not only when you apply for a
credit card, but also when you apply for a job or insurance, or when you
want to finance a car or a home.
Application Is Denied
If you’re turned down for a
card, ask why. It may be that you haven’t been at your current address or
job long enough. Or that your income doesn’t meet the issuer’s criteria.
Different credit card companies have different standards. But if you are
turned down by several companies, it may indicate that you are not ready
for a credit card.
If you’ve been denied credit because of information supplied by a
credit bureau, federal law requires the creditor to give you the name,
address and telephone number of the bureau that supplied the information.
If you contact that bureau within 60 days of receiving the denial, you are
entitled to a free copy of your report. If your file contains accurate
negative information, only time and good credit habits will restore your
credit-worthiness. If you find an error in your report, you are entitled
to have it investigated by the credit bureau and corrected at no
You should dispute any inaccuracy in your report with the credit bureau
and also with the company that furnished the information to the credit
Fees, charges, and benefits vary among
credit card issuers. When you’re choosing a credit card, shop around.
Compare these important features:
ANNUAL PERCENTAGE RATE (APR)
The APR is a measure
of the cost of credit, expressed as a yearly interest rate. Check out the
"periodic rate," too. That’s the rate the issuer applies to your
outstanding balance to figure the finance charge for each billing period.
For example, if you have an outstanding balance of $2,000, with 18.5%
interest and a low minimum monthly payment, it would take over 11 years to
pay off the debt and cost you an additional $1,934 just for interest,
which almost doubles the total cost of your original purchase.
This is the time between the date of a
purchase and the date interest starts being charged on that purchase. If
your card has a standard grace period you have an opportunity to avoid
finance charges by paying your current balance in full. Some issuers allow
a grace period for new purchases even if you do not pay your balance in
full every month. If there is no grace period, the issuer imposes a
finance charge from the date you use your card or from the date each
transaction is posted to your account.
Many credit card issuers charge an
annual fee for granting you credit, typically $15 to $55. Some issuers
charge no annual fee.
TRANSACTION FEES AND OTHER CHARGES
charge a fee if you use the card to get a cash advance, if you fail to
make a payment on time, or if you exceed your credit limit. Some may
charge a flat fee every month whether you use the card or not.
Many issuers have 24-hour
toll-free telephone numbers.
Once you get a card, sign it immediately so no
one else can use it. Note that the accompanying papers have important
information, such as customer service telephone numbers, in case your
card is lost or stolen. File this information in a safe place.
Call the card issuer to activate the card. Many issuers
require this step to minimize fraud and to give you additional
Keep your account information to yourself. Never give
out your credit card number or expiration date over the phone unless you
know who you’re dealing with. A criminal can use this information to
steal money from you, or even assume your credit identity.
Keep copies of sales slips and compare charges when
your bill arrives. Promptly report in writing any questionable charges
to the card issuer.
Don’t lend your card to anyone, even to a friend. Your
credit privilege and history are too precious to risk.
Issuers may offer additional
benefits, some with a cost, such as: insurance, credit card protection,
discounts, rebates, and special merchandise offers.
While a credit card makes it easy to
buy something now and pay for it later, you can lose track of how much
you’ve spent by the time the bill arrives if you’re not careful. And if
you don’t pay your bill in full, you’ll probably have to pay finance
charges on the unpaid balance. What’s more, if you continue to charge
while carrying an outstanding balance, your debt can snowball. Before you
know it, your minimum payment is only covering the interest. If you start
having trouble repaying the debt, you could tarnish your credit report.
And that can have a sizable impact on your life. A negative report can
make it more difficult to finance a car or home, get insurance, and even
get a job.
Federal law offers the following
protections when you use credit cards.
ERRORS ON YOUR BILL
You must notify the card issuer
in writing within 60 days after the first bill containing the error was
mailed to you. In your letter, include: your name; account number; the
type, date, and amount of the error; and the reason why you believe the
bill contains an error. In return, the card issuer must investigate the
problem and either correct the error or explain to you why the bill is
correct. This must occur within two billing cycles and not later than 90
days after the issuer receives your billing error notice. You do not have
to pay the amount in question during the investigation.
Kinds of Credit
If your credit card is used
without your authorization, you can be held liable for up to $50 per card.
If you report the loss of a card before it is used, the card issuer cannot
hold you responsible for any unauthorized charges. If a thief uses your
card before you report it missing, the most you will owe for unauthorized
charges is $50. You should be prompt in reporting the loss or theft of
your card to limit your liability.
Credit grantors generally issue three
types of accounts. The basic terms of these account agreements are:
A consumer pays in full each
month or chooses to make a partial payment based on the outstanding
balance. Department stores, gas and oil companies, and banks typically
issue credit cards based on a revolving credit plan.
A consumer promises to pay the
full balance each month, so the borrower does not have to pay interest
charges. Charge cards, not credit cards, and charge accounts with local
businesses often require repayment on this basis.
A consumer signs a contract
to repay a fixed amount of credit in equal payments over a specific period
of time. Automobiles, furniture, and major appliances often are financed
this way. Personal loans usually are paid back in installments,
The Consumer Information Center (CIC) publishes the Consumer Information Catalog which
lists more than 200 booklets on a wide variety of subjects, including
credit. Write Catalog, Consumer Information Center, Pueblo, CO 81009. Or
call them at (719) 948-4000.
Company offers free consumer booklets on a variety of credit
subjects. To order, contact: American Express Company, PO Box 4635,
Trenton, NJ 08650-9874. For information about students and credit, you can
visit The Money Pit
at American Express University.