Taking Charge of Your Credit
What's in Your Wallet?
Besides baby photos, a library card, and old receipts, you probably have a handful of credit cards stashed in there. But are you playing these cards right to get the best rates and rewards possible? And how will the way you use these cards now affect your payments down the line on a new minivan or home? We've got answers to these and other questions for once and for all.
Will Late Payments Hurt My Credit?
Yes! "One late payment is probably okay, but when you get to two or more late payments or one totally missed payment, it's going to cost you some points on your credit score," says Jeff Schumacher, senior vice president at Citi Cards. (For more on credit scores, see the next question.) Always allow five to seven business days for your check to get through the mail, or better yet, pay your bills online: When you get your statement, log on to the credit card's or your bank's Web site and schedule an electronic payment -- to arrive right on the due date if you like.
What Is a Credit Report?
When you apply for a credit card or loan, the company wants to know how much of a lending risk you are, so it contacts up to three credit bureaus (TransUnion, Equifax, and Experian), each of which gives it a credit report and a credit score. The credit reports show your borrowing history, and it's a good idea for consumers to check their reports at the three bureaus now and then. That'll allow you to catch clerical errors (credit-ruining inaccuracies ranging from typos to data about loans that don't actually exist are stunningly common) or to spot if someone has stolen your identity and is racking up debt in your name. "Plus, a new federal law allows consumers to get free copies of their credit reports once a year, so there's no need to pay a service to check it for you," says Joe Ridout, consumer services manager at Consumer Action, a nonprofit educational agency. For free reports from all three bureaus, log on to annualcreditreport.com.
Most lenders pay more attention to the bureaus' other information, your credit score, which is a computer-generated rating -- from 300 to 850 -- based on the information in your report. The higher that number, the less of a credit risk you're deemed to be and the better rates you'll get on everything from mortgages to car loans, home equity lines to credit cards. Many factors contribute to your credit score, including the length of your credit history (longer is better), how much you owe (less is better), and how many requests for new credit you've made recently (fewer is better). "But the biggest factor is whether you pay your bills on time," says Robert Hammer, a financial consultant who advises the credit card industry.
Interest and Rewards
How Can I Keep My Interest Costs in Check?
Don't just accept the interest rates that your credit card companies give you, says Curtis Arnold, founder of cardratings.com, a credit-card-review Web site. "If you're the type of person who meets payment due dates like clockwork, you can transfer your balances to a card with a low introductory rate or a fixed rate," he says. At press time, some cards were offering introductory rates of no interest for 12 months, while others were offering 4.99 percent fixed until the transferred balance is paid off -- in both cases with no balance-transfer fees. If you take one of these routes, you must make every minimum payment on time, and you'll need to resist using the card for new charges. (If you do, you may find yourself paying a hefty rate on those new purchases, even if you try to pay them off immediately.) And, in the case of an introductory-rate card, you need to mark the expiration date on your calendar and have the card paid off, or transfer the balances to another card -- which is called card surfing -- before the introductory term runs out. You shouldn't open more than one or two new accounts a year, however, because each application lowers your credit score slightly.
If all of that seems like too much trouble -- or your credit history prevents you from qualifying for those deals -- there's another solution: Just call your current credit card company and (gently) threaten to take your business elsewhere unless it lowers your rate. It'll probably drop it like a toddler tosses her Cheerios. (The best rates at press time were 10 to 15 percent, depending on your credit rating.)
Are Reward Cards a Good Idea?
Reward cards tend to have high interest rates, so if you ever carry a balance, forget earning a discount on that trip to Disney World. Instead focus on getting a card with the best rate possible. With interest rates typically about 15 percent higher than reward return rates, you can spend more on one month of interest than you'll gain in a year of rewards. But if you always pay your bill in full, why not let the credit cards give you a kickback for your business? You can get anything from airline miles to free merchandise from your favorite retailer, but the best deals for most people are cash-back cards, Arnold says. "The industry standard right now is 1 percent back on all purchases, but some cards offer 5 percent back for purchases at supermarkets, gas stations, and drugstores, and one card puts 1.5 percent back on everything into a linked investment account, which is a nice way to build some savings," Arnold says. Go to cardratings.com to find the best deals.
I Have Multiple Cards I Don't Use
Actually, it's a good idea to hang on to cards that you've had for a long time (like that first card you got in college), because they help to lengthen your credit history. Having a lot of credit cards won't harm your credit score, and neither will letting some accounts go unused. It's applying for a lot of new credit that has a negative impact, so resist the urge to apply for cards from retailers just for a discount on those sassy shoes or the dress you saw in the window. What's more, closing accounts can actually hurt your score -- by decreasing your unused available credit -- so shred the cards you don't use and leave the accounts open.
I Have Major Debt on Multiple Cards
Your credit card company would rather get something than nothing, so it's often willing to negotiate. Ask, and it'll almost always lower your minimum payments and possibly your interest rate too. Worst-case scenario: You can declare bankruptcy and avoid paying the money back. But that will ruin your credit for the next seven years and can have other lasting effects. If you need help deciding whether to declare bankruptcy or to negotiate with a credit card company, contact Consumer Action (at consumeraction.org or 415-777-9635). Or you can pay -- typically $10 to $20 per month -- to have Consumer Credit Counseling Service (moneymanagement.org) do the negotiating, collect a single monthly payment from you, and disburse it to your creditors.
My New Husband Has Bad Credit
To make sure that doesn't happen, don't apply jointly for credit cards or loans because doing so -- even once -- can ruin your score too. Instead, apply in your name only. You can get him a card on your account, but make sure he does not abuse it. (Remember: It's your credit that's on the line.) You may want to take over the bill-paying duties for the family so you can keep an eye on spending and get all the bills paid on time. Then pay down his outstanding debt as fast as possible and get him a card in his own name again -- for which you might still manage the bills -- to raise his score. "After all, wise credit card use builds good credit," Schumacher says. "And that will mean lower borrowing costs for the future."
Credit vs. Debit
Where accepted: Everywhere
Payment schedule: Buy now, pay later
Liability for fraud: $50 by federal law; some issues offer a $0 policy
Interest charges: 15 percent on average, if you carry a balance
If you overspend: Can run up huge interest charges
Reward programs: Hundreds available; standard is 1 percent back
Impact on credit: Irresponsible use can ruin credit; careful use can build good credit
In case of emergency: Can cover large costs
Where accepted: Everywhere, except for car rentals
Payment schedule: Buy now, pay now
Liability for fraud: No legal cap on liability if an identity thief empties your checking account, but some issuers offer a $0 or $50 cap -- if you report theft within two days
Interest charges: None
If you overspend: Can overdraw account
Reward programs: Few available; rebates are half the size and reported to IRS as taxable interest
Impact on credit: Don't need good credit to get one but also won't build credit history
In case of emergency: Can't cover more than what's in the bank account
Josh Garskof, the father of two, writes from Connecticut.
Originally published in American Baby magazine, July 2006.