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GET A CREDIT CARD?
What is a Credit Card?
In the 1950s, ritzy restaurants wanted a better way for their well-off customers to pay for dinner. Therefore, they invented the first credit card. While the credit card was born to satisfy the distinguishing palate, it eventually became much more. A credit card, today, is typically a line of credit that can be used to buy an expensive dinner or to buy just about anything else. If your limits high enough, you might just buy the whole restaurant. Credit card money can be spent, paid off, then spent again. This is known as a revolving line of credit.
Credit cards may be secured, meaning that some amount of money is held by the credit card issuer to guarantee that they will get some or all of their money back even if the cardholder decides not to pay. Most credit cards, however, are unsecured, meaning that the credit card company must rely on your word that you will repay the money you spend.
Every credit card has an interest rate that will be charged if you do not repay the money spent on the card within a certain time. That interest rate can vary from below 2.9% to above 21%. Interest rates should be a major consideration when choosing a credit card. Interest rates can be calculated in a variety of ways and it pays to understand how the interest rate is being calculated in order to understand what the credit card truly costs you.
Many credit cards carry an annual fee that can be as low as $15 and as high as several hundred dollars. The annual fee is used to defray some of the expenses of the credit card issuer (and maybe to create a profit.) Interest rates and annual fees often balance one another out. An annual fee may not be a bad thing if the interest rate is low enough.
How Do Credit Card Companies Make Money?
Credit card issuers make their money in several ways. First, the cardholder pays interest on the revolving loan if a credit card balance is not paid in full each month. Second, the cardholder makes a percentage of each item you purchase from the merchant who accepts your credit card. These rates range from 1% to 4% of each purchase. Last, the cardholder can make additional money through other means, such as selling your name to a mailing list or sending advertisements in your monthly bill.
Credit card issuers accumulate expenses that you may not have considered. They pass those expenses along to you through interest rates, annual fees, and late charges. The biggest expense credit card issuers face is the loss of money lent to other cardholders.
Because most credit cards are unsecured, if a person decides not to pay their debt, there is little a credit card issuer can do to get their money back. Often its more expensive to try to collect the money than write the bad debt off.
Credit card issuers must also justify the investment by making at least as much interest as they could make investing in real estate, bonds or other securities. Because of the risk of loaning money via a credit card, you may notice that credit card issuers typically charge higher interest than regular loans. Most credit card holders feel the higher interest is worth the convenience of using a credit card.
How Do I Qualify for a Credit Card?
When you apply for a credit card, the card issuer will do preliminary checking to determine how risky it will be to loan you money. Each card has a standard of risk that the issuer is willing to accept.
Risk is calculated by each credit card issuer differently through proprietary (usually secret) rating formulas. Most of these formulas, however, use the same basic information to gauge your likelihood of paying the credit card bill. This information includes:
Much of this information is taken from your credit report on file with one or more credit bureaus. When this information is typed in with your application, a computer calculates your score and decides whether you meet the credit cards standard of acceptance. You are either approved or denied.
All credit cards vary in their standards of acceptable risk. Today, there are so many credit cards, with so many different standards, that unless you are living under a bucket without a penny to your name, there is almost certainly a credit card for you. Understand, however, that the higher risk you are, the less credit you will receive, and the more you will pay for it. Some credit cards may even ask that you put some of the money up to guarantee their investment in you. That is known as a secured credit card.
To qualify for a specific credit card, you should do your best to understand what level of risk the credit card issuer is willing to accept. Often, the credit card issuer would rather find out by you simply applying for their card. However, this is not always in your best interest. Every time you apply for a credit card or other line of credit, the credit issuer checks your credit report with the credit bureaus. When anyone checks your credit report, an inquiry is added to the end of the report showing that you applied for credit. If several inquiries appear on your credit report within a short time, credit issuers will begin to deny you credit because of numerous inquiries. How’s that for a catch twenty-two?
It is therefore best to get a general idea if you are qualified for a credit card before you submit an application. Some higher-risk credit card companies publish their requirements. Most companies, however, do not. Even those credit card issuers will probably give you general guidelines if you press hard enough. The application entry agent should know enough from experience to give you an idea of what the credit card issuer will accept. These guidelines should help you to get an idea of whether or not you will be approved. In the final analysis, however, there is no way to tell until you apply.
Your Credit History. In order to get a picture of your credit standing, you need to see a copy of your credit report. There are three major US credit-reporting agencies, but you will probably get the best picture by ordering your Experian (formerly TRW) credit report. The credit report should take two weeks to arrive and it will typically cost you $8.00. Once you receive your credit report, carefully read the instructions and analyze your credit history. If you have any negative marks on your credit file, you will almost certainly be denied for standard credit cards. You may still want to apply, but do not hold your breath. If you have bad credit, begin two processes immediately:
Begin to restore your good credit.
Continue your search for a card that fits your less than perfect credit situation.
If your credit is perfect, you must still look at the other factors that will influence your credit application.
Your Income. Your income, or your ability to pay back debt, will greatly affect your chances of getting a credit card. Even so, many credit cards issuers will give credit cards with small lines of available credit to those with lower incomes (lets say under $1200 per month.)
Most issuers will be interested in your income versus the amount you spend each month. Total your income and subtract expenses such as rent, car payments, child support, other credit card payments, food, clothes, etc. Do you still have enough left over to pay your credit card bill? What if you max the card out? Will you still be able to pay the minimum payment? The credit card issuer will also consider your ability to pay the monthly payments in case you max all of your credit cards out.
In any case, you must have more than sufficient income to cover your current obligations plus the new credit.
Your Current Debt Load. As you consider your income, pay special attention to your debt load. While credit cards today allow a much higher debt load than in times past, you may be denied if your debt payments plus your regular monthly bills total more than 65% of your income.
Many creditors also look at your lines of open credit and calculate your ability to pay back your debt should you max out your credit cards. Some credit card issuers worry that you are on a credit binge and you are using all your credit and applying for new cards to boot. This is why it makes sense to close unused credit lines long before you apply for new credit. The open credit potential can result in a denial.
When you apply for credit, most credit card issuers ask you to disclose all of your debt. In addition to asking you, they will also check your credit report. The credit card companies typically update credit reports 4 times per year. You may notice that your latest credit reports shows old balances on your credit cards. Unfortunately, there is nothing you can do to get the credit card issuer to consider the actual, current balance on the cards. Virtually every credit card issuer makes it policy to believe the credit report first.
If you will be closing credit cards in order to bring your available credit down, you need to think well ahead. If you close a card today, the new information will probably not appear on your credit report for at least a month, sometimes as long as three will.
When most people calculate their debt load, they inadvertently skip items. Rest assured, the credit card issuer will not skip anything. The credit report tells all. So, when you go to calculate your own debt load, make sure to include everything. Be sure to include credit card debt, car payments, student loan payments, signature loans, and even co-signed loans. Short term medical bill payments, personal loans, and child support payments do not often show up on credit reports and you may choose whether to list them when submitting an application.
Your Amount of Time on the Job. Time at the same job demonstrates stability. Credit card issuers like stability because it means lower risk. A single year at the same place of business is good, but will not help you much. When you have been at the same place of business over five years, the credit card issuer will typically consider you a better risk.
When a credit card issuer asks you for your time on the job, you may wish to think carefully about the question. Many creditors consider your work in the same field as time at the same job. If you were transferred or if you continued working in the same position with another company, many credit issuers will accept that as a single term of employment.
You may ask the credit card issuer for clarification, or you may wish to simply answer honestly by saying, for example, I have been employed as an electrical contractor for three years.
Whether You Own or Rent Your Home. Homeowners are generally considered a better risk than apartment dwellers. You may be asked the length of time in your current residence. This also indicates how stable you are financially. People who buy a home often find that credit offers begin to increase.
Number of Times You Have Recently Applied for Credit (Inquiries). Because the credit report takes time to update, a credit card issuer cannot know for sure that your credit report shows all your credit lines. However, they can find out whether or not you have applied for credit recently.
Each time you apply for credit, the credit bureau lists an inquiry on one of your credit reports. Since there are three major credit bureaus, the inquiry will generally appear on one credit report. If you have been applying for credit all over town, each of your credit reports will probably show multiple inquiries.
Even if you did not accept the credit lines, or if you were denied, the credit card issuer must assume that you may have more credit than the credit report shows. This can lead to denial.
Inquiries remain on the credit report for two years, unless you work to take them off earlier. Of course, some inquiries are inevitable and are generally not a problem. However, multiple recent inquiries can be devastating to your chances. So, the more often you are denied credit, the more likely it is that you will be denied credit again.
What is the Difference Between Secured and Unsecured Cards?
Most credit cards are unsecured, meaning that the credit line is not connected to anything valuable such as a home or car. If you decide to stop paying on an unsecured credit card, typically, the credit card issuer cannot take your home or property. The credit card issuer can sue you for the debt, and even garnish your wages, but the unsecured card agreement does not give them rights to your property. In addition, if you declare bankruptcy, the credit card issuer will not likely get his money back.
A secured credit card is guaranteed against something of value. This is usually an amount of money kept in a savings account or held by the credit card issuer. When you obtain a secured card, you will normally pay an amount of cash to the credit card company and then you will receive a credit card with a limit. The deposit is held by the credit card issuer as a way to reduce the risk of extending credit to people with credit problems.
Sometimes that limit is the same amount that you paid to secure the card. This type of fully secured credit card is offered as a way to build credit. In addition, it provides the opportunities of a credit card such as car rentals, ordering by catalog, and getting a hotel room. Many secured credit cards are only partially secured. You pay an amount of money and the credit card issuer provides a credit limit that may be two or three times the amount of your deposit.
When you apply for a secured card, you should know several things:
Secured credit cards do help you build good credit. However, the card will usually show up on your credit report as a secured line of credit. This is not as good as an unsecured credit line when your credit is rated. In any case, if you cant get an unsecured card, then this may still be your best option. Most secured credit cards have annual fees. This is another way for the card issuer to reduce their risk. Pay special attention to these fees when you shop for a secured card. As with all credit cards, you should pay special attention to the interest rate of the secured card. Some secured credit cards will convert to fully unsecured credit cards after you have managed your card well for an extended period of time.
Consider these if you are trying to re-establish credit. Beware of secured or unsecured credit cards with easy qualifications that offer you unusually restricted credit lines. Some of these cards will only allow you to buy from the issuer’s special catalog, or perhaps you must pay a monthly payment in order to receive the card and a list of benefits. These types of arrangements rarely work in your favor. Also, beware of credit card brokers who claim they match your credit rating with credit cards that guarantee your approval. Typically, these brokers will simply send you a list of easy-qualification secured and unsecured credit cards, for a fee. You may obtain a much better list of credit cards for free, complements of Credit Card Network.
What Do I Do if I am Denied?
Being denied credit is frustrating. To make matters worse, you will find that the credit card issuer often can not tell you why you were denied.
When you are denied for credit, the credit card issuer is required to send you a notice of denial in the mail. This notice should tell you several things: why you were denied, which credit bureau was used to determine your denial, and notice that you can order a free credit report from that credit bureau to see what’s showing up on your credit report.
You will likely see that you were denied for several reasons. Some of these reasons may not make any sense. For one reason or another, many card issuers will give you three or four reasons for your denial when it was really only one thing that made them turn you down. If you have bad credit, you can rest assured that it was probably the main reason for the denial.
In any case, you should order your credit report as per the instructions on the denial letter. This will not create an inquiry on your credit report and it should give you an idea of what’s going on. You may want to apply for another line of credit with another company. Credit card issuers sometimes look at different credit reports. Each of your three credit reports will not look the same. If your credit problem is small (only one or two negatives), you may just get lucky when you apply with someone else. Remember, though, each time you apply for credit, another inquiry will appear.
If you were denied credit because of negatives on your credit report, you should begin to restore your credit. It is important to begin your credit restoration quickly, as it will take some time.
If you were denied because you didn’t have enough credit history, see Build Your Credit for free instructions on how to quickly build a good credit rating.
If you were denied because of a high debt to income ratio, you may want to take a hard look at your finances. Maybe the credit card company is right and you should not be racking up more debt. If you think that you CAN handle more credit, then order your credit report and see what it says. There may be some open accounts and misreported balances. Close unnecessary accounts and lower your credit card balances. Many credit card issuers do not like to see cards near or at their limits. Lower the balances of the credit cards that are closest to their limits. If you are paying high interest rates on some cards, you should pay them off to lower your monthly debt service payments.
Remember that these changes may not appear on your credit report for one to three months. Wait patiently before you apply again.
How Can I Increase My Credit Cards Limit?
Often, you can obtain a higher credit limit just by asking. If you have just applied for the card, you need to show better credit, better income, or a better debt ratio to persuade the credit card issuer to increase the limit on your new card. Sometimes, however, you may simply ask and they will increase your limit.
If you have had the card for more than one year, you can call to get your limit increased. If you have been good with your payments, the credit card issuer will usually oblige.
Very often, you can negotiate with credit card issuers. You may say, I need a higher limit card and I am going to have to transfer your balance to a new card if you cannot give me a higher limit. Every credit card issuer realizes that you have many choices in credit cards, especially if your credit rating is perfect. Because of this, they do not want to lose your business (especially if you carry a balance.)
There is a small price to pay for requesting an increase in your credit limit. Most of the time the credit card issuer will check your credit again before giving you a limit increase, and that causes an inquiry. Many credit card issuers increase your balance automatically as you pay your payment on time. In that case, an inquiry will not be made on your credit report.
How Do I Lower the Interest on My Credit Card?
Again, credit card issuers know that you can go to another card if they do not make you happy. Therefore, it makes sense to negotiate a better deal. You can simply call your credit card issuer and ask for a better rate. If they know you have better offers, it may make them even more likely to give you a better deal.
In one case, a couple had a low-limit MasterCard with a high interest rate. They had received the little card in college and had never closed the account. When they needed a $15,000 credit line for business, they went ahead and called the credit card issuer. They told the company that they would not be keeping the credit card unless they could get a competitive 12% interest rate and a limit increase to $15,000. The card issuer checked the couple’s credit, gave them the 12% interest rate, made the card platinum, and increased the limit to $17,000.
If your credit card company does not want to give you a good enough interest rate, you may want to consider a card with an introductory rate.
Are Low, Introductory Rates Really a Good Deal?
If you have good credit, you will have seen dozens of credit card offers for 5.9% introductory rate until March or 2.9% rate on all balance transfers. These rates are not always as good as they sound, but they do have merit.
Most introductory rates last only for a limited time. You should be clear about the permanent interest rate as soon as that period ends. It should still be a competitive rate.
Also, realize that introductory rates are limited in other ways, too. They do not usually apply to cash advances or even purchases. You end up with a credit card charging you two interest rates; one introductory rate for your balance transfers and one higher rate for every other charge. You may find that only some of your balance is costing 5.9% and the rest is costing 21% interest. When you make a payment, it is common for that payment to go toward the lower rate balance and not the higher rate cash advance or purchase balance. Soon, all of your introductory rate balance is gone and only higher rate balance remains.
If you are carrying a balance on a card, and you are not using the card very often, an introductory rate can be a good thing. You may even want to close the card at the end of the introductory period and open another account with another introductory rate. Do not forget introductory rates are also negotiable. You can say, I will go ahead and transfer all three of my credit card balances if you will extend the introductory period for three months more than your offer.
Are Benefit Cards Such as Cash Back and Flight Mile Cards Worth it?
Some credit cards give you benefits such as cash, frequent-flier miles, hotel discounts, travel discounts, or dollars toward the purchase of a car or appliance. Sometimes these cards are a great deal and sometimes they are not.
To figure out if the benefit card makes sense, calculate how much the benefit is worth to you and how much you would have to spend on the card to earn the benefit. If the interest rate or the annual fee on the card is higher than your other credit cards, calculate how much you are paying for the benefit card. Is it worth it?
Some benefit cards make great sense. If you run a lot of money through your cards, you can earn vacations, car rentals, and cash. Just be sure to do the math before you apply.
How Do I Choose a Credit Card if My Credit is Good?
In order to decide which credit card is right for you, you must first make a couple of decisions:
Once you decide on these three points, you can eliminate many possibilities right off.
If you will be carrying a balance on your card, you should look for the best interest rate/annual fee value.
If you will pay your bill in full each month, then you wont want a card with an annual fee. Go for the lowest interest rate card without an annual fee.
To determine your preferred limit, decide on the absolute lowest limit that will make sense. Then, add 30% to that number. This will give you a useful card that is still good for emergencies. Resist the temptation to take the highest limit that credit the credit card issuer will give you. You will do much better in the end by limiting the card to a reasonable amount.
If you are looking for special benefits, keep an open mind. You may find that the benefits are not worth the trouble. Often, you would do better just paying cash for the airplane tickets or appliances that come as a benefit of a credit card.
Once you have limited your list to a few cards that would fit your needs, you can then compare them on the basis of the following factors:
Interest rate. Which card has the lowest annual percentage rate?
Fixed or Variable Rate. The annual percentage rate (APR) can be either a "fixed" or a "variable rate. Fixed rate APR's do not go up and down, but they are usually a little higher. With a variable rate, the interest rate goes up and down based on economic trends. Because of the flexibility, you will find that a variable rate is generally lower, at least at first. A fixed rate is generally safer, but if the variable rate card is much lower, you may want to choose it. If you believe that the economy, or interest rates, will stay stable or get better, then a variable rate is not that much of a risk. In any case, if you will not be carrying a balance, the type of APR will not matter so much.
Grace period. Grace period is the time between the day you make a purchase and the day when the credit card issuer starts charging interest on that purchase. For most cards, the grace period is 25 days. However, some cards may not have a grace period at all. The longer the grace period, the better.
Other fees. You should know what late fee and over limit fee are charged. You should also know if the interest rate for cash advances is the same or is it higher than the card's regular APR. Also, ask if there is a lower limit for cash advances.
If you are considering several credit cards, you should make a chart to compare their benefits. By listing the factors mentioned above and comparing them side-by-side, you should be able to clearly determine which credit card is best for you.
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