When shopping for a credit card, one of the most important factors in your decision will not be the card itself, but will actually be your credit rating. Your credit rating, or credit score, will determine what sort of cards that you can qualify for and will determine your interest rate. So a few points in the downward direction of the credit scale could mean the difference between that low APR card with a high limit verses an enormous interest rate and very little buying power. So it is very important for you to understand what your credit rating is, how it is effected and how you can improve your credit score.
A credit rating is the financial world’s way of determining what is known as credit worthiness of an applicant seeking credit for any variety of reasons; not only credit cards but auto loans, mortgages, even rental application and utilities. Your credit rating is derived from three key factors: your financial history, the amount of income and current value of assets, and the total amount of your liability or debts. Your financial history includes credit and monetary accounts that you have held in the past, if those accounts are current, and how timely payments were made. Current assets can include not only your income but the value of any real assets such as property, etc. And finally your liabilities include whatever debts you currently have and both the total amount of the debt along with the monthly payment commitment is taken into account.
Credit Bureaus compile this information and give you a score based on all of the above factors, this score is your credit rating. There are three main credit reporting agencies which include Experian, TransUnion, and Equifax. Each of these agencies use a slightly different method for calculating your credit score, FISCO being one of the most popular and used the most by mortgage companies and others who try to assess the risk involved in extending you credit. These scores generally range from 300-850. Scores in the lower range is considered bad or poor credit, higher range is good credit, etc.
Some credit card companies will only approve applications within a certain range of scores. Others will have a much broader range that they will accept; however, they will adjust interest rates and fees to make the risk more beneficial for them. Those applicants with exceptionally poor credit or with no credit history at all can also find guaranteed acceptance or secured cards that will help to establish (or re-establish) their credit. So it is very important for you to review your credit report periodically for accuracy and to know what your score is so that you might better assess your credit options. Keeping up with you payments in a timely fashion and not over extending credit will help to improve your rating. In the U.S., consumers are entitled to one free credit report per year so be sure to take advantage of this.
Credit card frauds cost card holders and credit card companies millions of dollars every year. Although some of the fraudsters use ingenious methods, most of the people committing fraud on credit cards use very mundane methods that are anything but hi-tech. Again, although some of the fraud occurs due to factors beyond the control of the card holder, as for example the leakage of vital and sensitive information by company employees who have access to such information, most of the fraud occurs because of information or help provided by the cardholder. From this, it should be clear that most, although not all, of the fraud can be prevented if you take sufficient care.
The most obvious and common type of misuse is through the physical theft of the card itself. When somebody steals your card, he or she is as good as stealing money from you. For this reason, you should always keep your credit card in a secure place, and carry it around with care. Abuse of the trust is a closely related and common means of fraud. Never let anyone borrow your credit card. If necessary, use it on their behalf, but do so yourself.
Take care to sign on the credit card as soon as you receive it. When you use your credit card at a shop or restaurant make sure that you get it back immediately after the transaction is over. Wherever possible, do not lose sight of the card when the bill is being made out.
Fraud using credit cards online is a major problem. To avoid your credit card being misused on the Internet, make sure that any site in which you are giving your credit card number is secure and trustworthy. Never use your credit card on the Internet unless you are sure of the site.
Do not part with your PIN or credit card number and the three digit extension, unless you have to. You should be particularly careful of emails from unknown persons promising attractive rewards, or pretending to be company officials, and asking you for these details. Ditto for information over the telephone.
Finally check your card statements carefully as soon as they arrive and report any discrepancies immediately. Also, report the theft of your card, if it happens, as soon as you come to know of it. Your liability could reduce substantially if you do so.
You might well be wondering why transferring balances from one credit card to another is at all being discussed. After all, with so many eager hopefuls out there to oblige you, all that you have to do is to grab the first attractive offer, get the balance transferred and be done with it. Unfortunately, things are not always that simple. But before we go into the details, for the benefit of those of you who are wondering what this is all about, let’s do a brief recap.
The competition among credit card companies is so hot that they would do anything to grab one another’s business. Transfer of balance debts on your credit card is one such thing. The new credit card company would offer to transfer all the debts that you have accumulated in your old credit card to a new credit card issued by the offering company. The attraction for you is that for the first few months (usually six months to one year), you pay no interest on the transferred balance. If that sounds too good to be true, don’t worry. Credit card companies do make such offers and honor them too. You may be asking what the catch is. There’s none really, provided you are careful enough.
The first thing to remember about such balance transfers is that any payments that you make are first adjusted towards the transferred balance. Makes sense, doesn’t it? You can hardly find fault with the credit card company for wanting to recover the transferred loan at the earliest. The problem is that if you make purchases in the meanwhile, these purchases will attract normal interest, which as you know can be pretty hefty. So don’t go on a buying spree thinking that for the first six months you don’t have to pay any interest. That applies only to the transferred balance, and since any payments made by you are adjusted against this interest free portion, you are almost certain to end up paying interest on you fresh purchases. What’s worse, you could end up building a new debt because of all those purchases, even as you are in the process of paying off the old one.
The moral of the story: Never transfer credit card balances without first planning carefully about how you propose to repay the debt on the new card, and how you propose to use it. It might be a nice idea not to make fresh purchases on your new card till you pay off the old debt fully. Use a separate card for new purchases if necessary.
Using credit cards for making your payments and for shopping is a great convenience, and life without credit cards has become unthinkable for most of us. Most credit card companies offer flexi pay plans that allow you to just pay a small percentage of the total amount due each month, and carry forward the remaining amount to be paid in future months. This sounds like a very attractive proposition, offering you the benefit of buying what you want now, and paying for it later at your convenience. In fact that’s exactly the way credit card companies promote this facility. However, all’s not well with this scheme of things, and you should be aware of the pitfalls in using this facility, which unless you do so sparingly, can lead you into a debt trap. Let’s see how.
Suppose you make a purchase of $1,000 on your credit card, and the company requires you to pay just 5% of the outstanding amount, you are happy because you just have to pay only $50 on a purchase of $1,000. The credit card company is happier because it’s going to fleece you with a high interest of up to 2 or 3 percent per month.
Matters can go out of hand if you are not too careful. For example, if you are tempted to make another purchase of $1,000 again the next month, your total debt will rise to $2,000. At an interest rate of 3%, you will also pay an interest of $30 per month. If you’re still wondering where the debt trap comes in, all that you have to do is to repeat this for a few more months, and your monthly installment itself will come to the original purchase figure, not to speak of the interest. This is something that routinely happens to scores of people, and is not just a figment of imagination. So you need to be really careful not to get into such a trap. How can you avoid getting into one?
The easiest way is to avoid postponing your credit card payments, even if the company allows it. Make it a point to pay up all credit card dues as soon as they fall due. If you feel you can’t do that, consider postponing the purchase or expense unless it is absolutely essential. Making payment up front is the smartest way you can use credit cards, because you do get a credit of a few days to a month, at zero percent interest. On the other hand, if you accumulate credit, all your future purchases will attract interest from the date of your purchase. In effect this would result in your losing the facility of interest free credit that you would otherwise enjoy.
The convenience of using a credit card to make your payments without carrying cash around with you can be offset by serious disadvantages if you are careless. Here are a few tips on how to use your credit card.
- Avoid using your credit card for routine payments such as grocery bills. If you still need to make these payments using your credit card, keep a separate card for this purpose, and ensure that you make the payments on this card promptly. If you don’t do this, you may end up paying interest on your routine expenditure.
- Use your card’s credit facility sparingly, and for one-time large purchases or emergency expenditure. Make sure that these are charged to a separate card, so that you can enjoy the credit facility without losing sleep, or loading the interest burden on other expenses.
- Ask yourself whether you really need credit, and if so for what period. Make a plan for the repayment of the credit on the credit card. It is a good idea to use your card’s credit facility only if you are sure that you would be able to repay the amount within a short period. If you need credit for longer periods, you should look at other options that offer you longer term credit on more favorable terms.
- Know the charges that are applicable on your credit card. This will help you to plan your expenses, and also help you know in advance what lies in store for you. The usual charges are interest on outstanding amounts, transaction fees, late payment charges, and annual fees.
- Credit card companies generally charge a onetime transaction fee on cash withdrawal, even if you pay the amount on the card as soon as you receive it. It is generally not advantageous to use your card to withdraw cash. You should rather use it for paying off the expenses directly, if possible.
- Finally, make sure that you pay the minimum amount due on your card on time. In any case, avoid being labeled as a defaulter, because that can damage your credit history.
The long and short of it all is that you should use your credit card only as a convenient means of paying your expenses, and not as a source of credit, which you can obtain on better terms elsewhere. It is also important to ensure timely payment of the dues to avoid penalty charges and high interest rates.
