Credit Management

Find out more about Credit Management

Here is a guide (Sixty Seconds to be exact!) to management of your credit cards – Thanks to fool.com

Credit cards are the most widely available financial product around. More than 80% of households have at least one. And if you dare to classify yourself as “average,” you have about eight charge cards currently demagnetizing themselves in your wallet.

To bolster your status as an upstanding citizen of the world of plastic-powered purchasing, spend a minute learning how to manage your credit.

0:60: How much is enough?
Your debt-to-income ratio measures how much debt you carry, versus how much money (after taxes) you have coming in. In the world of lending, it is acceptable to carry 25% of your income in debt. Consider this example, though:

* Total credit card debt: $6,437
* Total after-tax annual income: $30,000
* Debt-to-income ratio: 6,437 / 30,000 = 21.4%

A 21.4% debt-to-income ratio is awfully high, in our opinion. The ideal number is zero. But at the very least, you want to keep your debt — including car loans — to 15% or less of your after-tax income.

0:53: Don’t pay by their rules
The “minimum amount due” is cleverly calculated to keep you beholden to The Man for your entire adult life. A $4,500 balance will take 44 years to pay off at the minimum rate, even if you don’t put another dime on the card. Oh, and the interest you’ll pay on that loan? A cool $17,000.

0:46: Watch out for fees
You name it, and lenders have found a way to charge you for it. Of course, there are the obvious fees — those incurred for late payments, overdrafts, ordering a replacement card, using a “convenience check,” or requesting an extra account statement. But there are also some less obvious, newfangled fees — ones that even the best customers should beware. When you transfer a balance — either to or from your card — you could get hit with a fee. Wanna talk to a customer service rep instead of a phone automaton? Pony up, please. Decided not to use your card for awhile? Your lender may hit you with an inactivity fee.

0:35: Play the system
Remember, you’re the customer. Do you want a lower interest rate? Sick of paying an annual fee? Uninterested in paying the $35 late payment fee — and swear that it won’t happen again (at least in the next six months)? Just ask! Your lender would rather keep you as a customer than shell out (anywhere from $50 to $150) to acquire a new customer. Use your leverage.

0:26: In trouble? Stop charging
If you find yourself struggling to make even the minimum payments on your credit cards, stop, drop, and roll. (This advice works well if you happen to catch on fire, too.) Stop charging. Drop your spending. And roll your balance over to a credit card that charges a lower interest rate. Then pay it off with fervor. Lather, rinse, repeat.

0:23: Boost your credit GPA
You have the power to see how you rate in the eyes of the banking world. Lenders use your credit report (provided by three major reporting agencies) and your credit score (a three-digit number based on your credit history) to measure your creditworthiness. The good news is that your borrowing transcript is at your fingertips. Check out what’s there to make sure that your record accurately reflects your credit habits.

0:18: Carry just what you need
Most people need only one or two credit cards: one for purchases they pay off each month, and another for emergencies (or business purposes). Any more than that is usually overkill.

0:13: Get some free stuff
If you’re going to use your card anyway, why not get something back for your trouble? If you consolidate your spending on one card, consider getting a “rewards” card where you earn miles, stuff, or cash back on your spending. Look for a card that will award you stuff you’ll actually use. (Cash is usually a good option, eh?) Still, don’t let your spending get out of control just to earn a free golf bag or a few extra airline miles.

0:05: Teach your children well. A totally cashless society is becoming less futuristic every day. If you have any critters, let them know that the shiny plastic card represents the amount of money you have to spend on Barbies and Barney.

The word “credit” can conjure up images of burdensome debt, but good credit management can improve your quality of life and result in increased buying power and long-term savings. In today’s world, the use of credit is expected, so it’s important to understand what choices will positively or negatively affect your credit rating on your credit report.

Using credit wisely is better than not using it at all
The old mindset that paying with cash is better than using credit is outdated. Like the habit of stuffing your life savings into your mattress or a sock, this principle is no longer applicable. Almost every major purchase depends on good credit, so establishing a healthy credit history is essential for those times when you need credit. If you pay for everything in cash, you won’t have the proof that you are a responsible borrower, and lenders will be reluctant to extend credit.

Instead, plan your credit use wisely so your credit use today will build a positive credit rating. All lenders check your credit report before extending credit–even for those preapproved offers you get in the mail or see advertised. The three major credit bureaus (Experian, Equifax and TransUnion) keep track of records sent from all major creditors. The credit bureaus assign a grade to your account, referred to as your credit score. Lenders check this score and the details of your credit record to see if you have a history of using credit wisely. What they find on that record determines the amount of credit you can get, and the interest rates that you will be offered.

Credit and everyday life
You’ll be surprised to know that wise credit use can enhance more than your interest rate on a mortgage, credit card or automobile loan. Insurance premiums (even on auto insurance) and employment opportunities are also affected by your wise or unwise use of credit. All of these organizations–employers, insurance providers, credit card companies and lenders–will check your credit history before offering you credit, insurance or possibly even a job.

Using credit wisely also affects how much interest you are charged by lenders, and these savings add up over time. Mentally estimate the following savings: lower interest rates on credit cards, lower rates on our mortgages and car loans and lower insurance premiums. Now add in the financial benefits of better employment opportunities, and you’ll see that wise credit use pays off.

Evaluating your credit use
It’s challenging to find out if you’ve been using credit wisely, but there’s a way to take most of the guesswork out of the game.

Order three copies of your credit report from the three major credit bureaus, and compare the reports to see how you’re doing. The Fair Credit Reporting Act (FCRA) requires all three bureaus to give you free copies of your credit report annually if you request them. You can order these reports online at the following Web addresses: www.experian.com, www.equifax.com and www.transunion.com.

Compare all three credit reports, look for misinformation and dispute any incorrect data. Make sure that positive accounts are being reported to all three bureaus, since every positive report improves your overall credit rating.

Your credit report is a basic guideline for using credit wisely. Basically, the credit bureaus penalize you for not making payments on time, borrowing more money than you can repay in a reasonable amount of time or extending yourself too far by spending more money than you make. By reversing these statements, you can outline a plan for wise use of credit.

Be sure, too, that your credit isn’t maxed out and that you don’t hold too many credit cards. Consolidate debts if needed to reduce your debt and the number of credit cards. One of the biggest parts of using credit wisely is having some breathing room. Lenders like to see that you’re not using all of your available credit.

We all know some of the advantages of credit cards. They are more convenient than cash, they are useful in an emergency, and sometimes they are the only option, such as when you are reserving a rental car. However, credit card advantages go far beyond mere convenience.

1. Protect yourself
Using a credit card can help you track your expenses and avoid fraud.

* Keep your receipts, check them against your monthly statement, and notify your card company right away if you spot any errors.
* Report suspicious charges or a missing card by calling the emergency number on the back of your statement. In most cases, you won’t be held responsible for any charges if your card has been stolen.
* Sign up for Online Banking and receive automatic security alerts1 that will advise you of unusual activity on your account, such as a requested change of address.
* Use account alerts1 to let you know even more, such as if your card is used to make a foreign-currency purchase.
* Check with your card issuer about damage protection. Some cards provide protection if you buy merchandise that turns out to be defective. If you are unable to resolve the problem with the merchant, you may not be charged for the item.

2. Build your credit history
Used responsibly, credit cards can have a positive effect on your credit score. Lenders and issuers of credit—mortgage companies, credit card companies, retail stores, utility companies—review your credit score and history to see how prompt and responsible you are about paying back your debts. By using your credit card regularly and making your monthly payments, you build a solid credit history that says to potential lenders: You can trust me.

3. Save money
Paying your credit card bill on time every month saves you money both now in the future. If you pay off all or most of your balance every month, you will spend less money on interest. And since timeliness in paying bills is a factor in determining your credit score, in the future you are more likely to qualify for low-interest rates on mortgages, cars, and other big-ticket items.

4. Reap the rewards
Credit cards offer you all kinds of extras that cash doesn’t. Depending on your card, you may earn one or more of the following rewards:

* Air miles
* Cash back on everyday purchases, including gas and groceries
* Discounts on purchases with retail partners

5. Added protection for travelers
Check whether your card offers any of these additional credit card advantages that help you save money on travel:

* Trip cancellation/delay insurance
* Lost luggage insurance
* Travel and emergency assistance

Only you know what credit card advantages are best for you. Check with your card issuer and see what they offer, and to find a card with rewards that match your lifestyle and interests.

If you’ve struggled with credit card debt you may be asking yourself, “Should I cancel my credit card?” No credit card, no temptation, right? Before you make any decisions, consider all the advantages of holding on to your credit card.

Danger of revolving cards
If you cancel your credit card, down the road you may realize you need one after all. Frequently opening new credit card accounts is a sign your finances are unstable: to creditors it appears you are constantly short on cash and need more credit to keep you afloat. To avoid this impression, and its negative effect on your credit score, hold on to your current credit cards and keep them active by using them every few months or so.

Lose the card, lose the history
If you’ve had a credit card for several years, you have a long reported history on that card. But if you cancel a credit card, that credit history will eventually fall off your report. A long credit history has a positive effect on your credit score, so hold on to your oldest credit cards.

Benefit from paying down your balance
Your FICO credit score takes into account the proportion of your credit line you use. In other words, having a low, manageable balance—or paying it off in full—may help your credit score. On the other hand, cancelling your card reduces your available credit line, so it may hurt your score.

A new card can be hard to get
These tough economic times are making it more difficult to qualify for a new credit card. With banks tightening up their lending standards, credit card applicants may find it hard to get new plastic. The lesson? Hold on to the cards you have, and use them wisely.

Keep your card for emergencies and convenience
If you need money for an emergency, the immediate buying power of a credit card can be a lifesaver. Also, using credit cards can make your purchases easier, such as booking a trip, shopping online, or over the phone.

Use credit with care
So now you’re convinced to hold onto your cards, right? Make sure to use them responsibly so they’ll have a positive effect on your credit score. Here’s how:

* Monitor your spending. Instead of waiting for your monthly credit card statement, record your transactions or review them with online banking. This will help you quickly recognize if you are spending more than you can afford. If that happens, examine your budget for ways to cut back.
* Make all your payments on time, since delinquent payments have a negative impact on your score. Use payment reminders to let yourself know when your payment is due.
* Try to pay your balance in full each month. If you can’t pay off your balance monthly, pay more than the minimum to keep your total credit card debt from creeping up.