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Basics
Basics

Basics

What is Credit Anyway? Credit is a privilege and a convenience. It is defined as “a reputation for sound character or quality -standing; influence based on the good opinion or confidence of others; reputation for solvency and integrity entitling a person to be trusted in buying or borrowing; an arrangement for deferred payment of a loan or purchase; and the time allowed for deferred payment.” Credit lets you pay for goods and services on an installment plan, take out a loan for a house, pay for clothing on a credit card, or pay for schooling with financial aid. Credit allows you to make a purchase without ready cash. You get credit by promising to pay in the future for something you receive in the present. But, there are strings attached; credit usually costs something (interest), and what is borrowed must be paid back.

Your reputation and character as a consumer are often determined by how others perceive your past credit history. Institutions and individuals who let us use their money want some kind of assurance that they will be paid back. Credit histories provide them a way to measure our financial integrity.

What is a credit report? When you apply for credit, the potential credit issuer reviews your credit report before approving your application. The three major credit agencies are Equifax, Experian, and Trans Union. These agencies, which are also called “bureaus,” collect and report information about consumers’ financial habits and put the information into a credit report. Each agency’s reports contain the same basic information: name, Social Security number, current and previous addresses, details about loans and how they’ve been handled, public record information such as bankruptcies, court judgments, or liens, and a list of companies that have reviewed your credit.

Why do I need credit? Credit gives a number of benefits you don’t get when paying with cash or checks: Convenient, hassle-free shopping. When you use a credit card to make a purchase, you don’t have to carry a lot of cash, pay by check, or present additional identification. A credit card also simplifies and speeds up catalog ordering and currently is virtually the only way to make Internet purchases.

Emergency protection. Credit cards are the ultimate financial security blanket. They can get you through nearly any emergency situation.

Easier budgeting. With a credit card, you can make purchases and pay them off on a schedule that fits your budget. Credit cards also allow you to take advantage of sales and special offers.

Security. If you lose cash, it can be used by anyone. If you lose a credit card and report the loss to the card’s issuer before it is used, the 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 is $50.

Travel expenses. You’ll find that a credit card is almost essential for renting a car, purchasing an airplane ticket, or booking a hotel room. Whether you’re across town or on another continent, a credit card is the universal guarantee of your good financial standing. And if you need cash, you can get it at ATMs or banks around the world that accept your credit card.

Establishing a good credit history is an important part of your personal and financial future. It can help open doors for you or keep them locked. A variety of people and businesses make decisions affecting your future based on your credit history. Banks and other lenders consider your credit report when reviewing applications for mortgages, revolving lines of credit or other loans. Landlords sometimes use credit reports to decide among rental applicants. And a potential employer may even assess an applicant’s credit report prior to extending a job offer. Your credit report may also be reviewed when you apply for auto insurance or homeowner’s insurance, or even a mobile phone. This is why it is so important to establish good credit.

How do I establish a good credit?: In short, by consistently paying your bills on time. Remember, to establish a good credit rating you should always pay at least the minimum amount due every month by the due date.

Crazy Lady
Crazy Lady

Crazy Lady

So you get a pre-approved credit card offer in the mail from some credit card company. The offer states that you are pre approved for a Gold card. Simply accept the offer and you will receive your card in a few days. But wait! There’s more. Act now and you will only have to pay a $29 dollar set up fee, a $95 program fee, a $48 annual fee, and a monthly servicing fee of $84 annually! Really act now, and we’ll throw in an annually percentage rate of 79.9% just for you. That’s right only 79.9 Percent!!! You so need this credit card. Be sure to really, really act now while we are still in business.

Sound crazy to you? Well this is a true story, kinda. Customers of a certain credit card issuer have reported getting pre-approved credit card offers in the mail with rates similar to the rates above. I understand that some credit card companies wanted to raise rates ahead of the new credit card laws which took effect in Feb 2010, but yikes! This company seems to have lost its ability to reason. As if the fees weren’t crazy enough (if your credit limit was $250 you’d get your card with $71 of credit because of the fees) they really win you over with the 79% interest rate. This particular example offer is for people with “less than perfect” credit. With offers like this, I’m not exactly sure how you’d ever get perfect.

How about this one? You get a credit card offer in the mail that states you’ll earn cash back on everything. You’ll get a full 1% cash back on all purchases, and 0% APR on balance transfers with no annual fee. Are you interested? Please don’t mind the fact that we just raised interest rates on many of our longtime loyal customers with excellent credit. Though some of these folks have been good on-time paying customers for over 20 years, in some cases we raised their rates from 9.9 percent to 30 percent so that we could make more money after the new credit card laws take effect. We may also rescind the no annual fee offer and require you to pay as much as 90$ per year for your card. So apply now!

We really need your help to pay our top executives ridiculous bonuses so that we may keep in pace with the rest of the ridiculous banking sector bonuses you may have heard about in the news. You see our top three executives will need a total of nearly 12.5 million in cash bonuses. We also have at least 15 other Citi executives who will need multimillion-dollar payouts as well. So don’t mind our rate hikes, send what you can because we really need your help. We may even consider implementing a mansion-less executive fund for some of our less fortunate executives.

Sound crazy to you? Well this too is a true story, kinda. Ok, I made up the part about the mansion-less executive fund for less fortunate executives, but the rest is true. So is it me or has Citibank has lost its mind? If the above actions aren’t bad enough, to avoid greater regulation Citibank even promised congress and it’s customers it would not reserve the right to raise rates at any time for any reason. Of course this promise was made right before they raised rates on their customers.

So I ask you again, is it me or are some of these credit card companies crazy?

First Credit Card
First Credit Card

First Credit Card

Getting your first credit card and using it wisely is key to developing and maintaining good credit your whole life. Many young people and students in recent years were targeted with credit cards they could not handle and are now suffering the results of the choices they made with their first credit card. Learn how to choose the right card and use it to build your credit with this review.

Credit CARD Act

The recent passage of the Credit Card Accountability, Responsibility and Disclosure Act which went into effect in 2010 makes it more difficult for young people and college students to acquire credit cards. The Act addresses the fact that young people lured by credit card giveaway programs and easy credit ended up in credit nightmares that they could not handle. Under the provisions of the Credit CARD Act credit card companies can only issue credit cards to young adults under the age of 21 if there is an adult co-signor or the young person can show proof of sufficient income to use the card. Credit card booths and credit card marketing is now expressly banned from marketing at or near college campuses or college events.

Getting your first credit card

If you are ready to apply for your first credit card either because you are employed with enough income to apply or you have an adult co-signer or you are over 21 then you need to be prepared to choose wisely when applying for your first card. The benefits of having a credit card include convenience, building a credit history, qualifying for lower rates on auto loans or mortgages and reducing insurance premiums. A good credit score can also help in renting your first apartment, buying a cell phone service or your first car.

Check out the offers

1. Look at the interest rates and fees. There are lots of different cards to choose from and it can be hard to tell which offers will work best for you. Avoid cards that offer initial low interest rates that has the potential to increase in the first year. Typical fees for a student card run around 14% – 17% Don’t accept offers from credit card companies charging high annual fees.

2. Do check out student credit cards offered by major credit card companies.

3. Make sure that the card you choose reports to all three credit bureaus: Equifax, Experian, and TransUnion. This is important because you want to make sure that you are building your credit history.

4. Only apply for one card at a time and preferably only one a year. This will help limit the possibility that you will get in trouble financially.

Use your card wisely

Once you get your first credit card be sure and use it wisely to start and keep your good credit history and responsible first credit experience. Below are excellent choices for a first credit card.

Understanding the term APR is important in all aspects of your financial life. APR is calculated the same regardless of how it used. It is the simple interest you will be charged on an annual basis for any credit you owe, it can then be calculated to a monthly figure or an adjusted figure.

If you borrow $100.00 at 12% interest (APR) and it must be specified APR as interest can be calculated and advertised in different manners, so it is important to find the APR and by law it must be in most advertisements for credit. This means if you multiply the $100.00 you borrowed by 12%. You will have the interest or the cost of the loan for a year’s period. In this case your annual interest cost is $12.

This gives you a good comparison and level playing field to compare interest rates against each other. This is not necessarily the interest you pay. You have to be very careful to read all of the information about the credit card, before you make a decision.

Some cards offer a lower APR for a short promotional period and at the end of the period the interest rate increases. This means each month the interest rate is calculated on a yearly basis and divided by 12 to determine the interest for that month. Assuming you pay the interest each month, the credit card company will continue to calculate your interest month after month. If you have a promotion for 12% for 90 days, the credit card company will charge you $1. per month in interest which is 1/12 of the interest we calculated above. Many cards have this hidden clause about the promotion and each month’s outstanding balance is calculated at the present interest rate so your interest rate after the promotional period soars to 18%. At the end of the month the credit card company will calculate your new balance at 18% interest, which on that $100.00 is now $18.00 or $1.50 per month, so your monthly interest has skyrocketed from $1.00 to 1.50.

Most credit cards also have different APR rates for different types of charges. The most significant is for cash advances, some cards offer 12% APR on purchases and 18% on Cash Advances. So the companies do two calculations to determine your interest payment. One important item they forget to tell you is that they never apply a payment to the higher interest debt, until the lower interest rate debt is paid in full. For example if you own $500. on your card at 12% and $200. on your card at 18% and you send in a payment of $200. to pay off the higher interest rate, the credit card company will apply it to the $500. at 12% and you cannot instruct them otherwise. As long as you have a balance on the lower rate you will never be able to pay off the higher rate, so basically you are now paying 18% interest.

In the past credit card interest was tied to the Federal Reserve’s prime interest rate or to Treasury bond interest rates and there were laws controlling the amount of interest that a credit card issuer could change. These things have slowly changed, disguised as part of credit card consumer protection bill.

Out of the blue, when interest rates were dropping to the lowest level in years, credit card companies began to raise interest, even to card holders with exceptional credit, these rates escalated and escalated. Not just from one issuer but from all, it was like price fixing. Overnight the card companies increased everyone’s rate or sent out new terms and conditions notifying the holders of new rates and special opt out conditions. How far will it go, the average rate today is over 13%, and these are hard to come by, most new cards are being offered at 14.%

The sky is the limit. Be a smart credit consumer; make sure you check the details of your credit card before changing or charging.

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1. Intro APR – Introductory Annual Percentage Rate

The introductory annual percentage rate is a starter rate offered by the card issuer. This rate is usually lower than the normal annual percentage rate or “Regular APR” and is offered for a limited time period to encourage you to apply for a credit card and balance transfers from your other credit cards if applicable.

2. Intro APR Period – Introductory Annual Percentage Rate Period

The introductory annual percentage rate period is the length of time the credit card issuer is offering the introductory APR. Typically the intro APR normally last from 3 to 15 months after you are issued the credit card. Once this period expires your interest rate will enter the “Regular APR” period.

3. Regular APR – Regular Annual Percentage Rate

This is generally the interest rate you will pay during the remaining life of your card. This rate may change if you default on your payments. The APR is a measure of the cost of credit, expressed as a yearly rate. It must be disclosed before you become obligated to a credit account.

Some credit card plans allow the issuer to change your APR when interest rates or other economic indicators — called indexes, change. Because the rate change is linked to the index’s performance, these plans are called “Variable Rate” programs. If you’re considering a variable rate card, the issuer must also provide information that discloses to you: how the rate is determined, which index is used, and what additional amount (“margin”) is added to determine your new rate. You will also receive information about how much, and how often your rate may change.

“Fixed Rate” plans are not subject to adjustment like variable rates. If you do not default in your payments, they remain at the disclosed level indicated upon opening the account. You’ll want to select a credit card with a low fixed APR whenever possible.

4. Annual Fee

Many issuers charge annual membership or participation fees. The fees range from $25 to $50, sometimes over $100 for “gold” or “platinum” cards. This is a charge you will pay each year for holding the credit card regardless of the amount of the balance on your card. Typically the fees are higher on credit cards for people with bad credit or individuals whom have not yet established credit.

5. Balance Transfers

This indicates whether the credit card offers balance transfers. A balance transfer credit card gives you the ability to transfer balances from other credit cards to take advantage of lower interest rates. Often balances can be transferred while enjoying a lower APR for a limited time period.

6. Credit Needed

This section indicates the type of credit you will typically need to be approved when you apply for a credit card. Generally there are three categories of credit. Excellent credit, good credit, and bad credit / no credit / needs improvement.

Other Credit Card terms you should understand:

When you’re applying for a credit card, be sure to consider the terms and costs associated with the card. They can make a difference in how much you pay for the privilege of borrowing. The following are some important terms to consider that must be disclosed in credit card applications or in solicitations for credit cards. You may also want to ask about these terms when you’re shopping for a card.

Grace Period: Also called a “free period,” a grace period lets you avoid finance charges by paying your balance in full before the due date. Knowing whether a card gives you a grace period is especially important if you plan to pay your account in full each month. Without a grace period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account.

Transaction Fees and Other Charges: A card may include other costs. Some issuers charge a fee if you use the card to get a cash advance, make a late payment, or exceed your credit limit. Some charge a monthly fee whether or not you use the card.

Balance Computation Method: If you don’t have a grace period, or if you expect to pay for purchases over time, it’s important to know what method the issuer uses to calculate your finance charge. This can make a big difference in how much of a finance charge you’ll pay — even if the APR and your buying patterns remain relatively constant.

Examples of balance computation methods include the following.

Average Daily Balance: This is the most common calculation method. It credits your account from the day payment is received by the issuer. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made to your account that day. While new purchases may or may not be added to the balance, depending on your plan, cash advances typically are included. The resulting daily balances are added for the billing cycle. The total is then divided by the number of days in the billing period to get the “average daily balance.”

Adjusted Balance: This is usually the most advantageous method for card holders. Your balance is determined by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren’t included. This method gives you until the end of the billing cycle to pay a portion of your balance to avoid the interest charges on that amount.

Previous Balance: This is the amount you owed at the end of the previous billing period. Payments, credits and new purchases during the current billing period are not included. Some creditors also exclude unpaid finance charges.

Two-cycle Balances: Issuers sometimes use various methods to calculate your balance that make use of your last two month’s account activity. Read your agreement carefully to find out if your issuer uses this approach — and, if so, what specific two-cycle method is used. If you don’t understand how your balance is calculated, ask your card issuer. An explanation must also appear on your billing statements.

Before selecting a card, be sure you know which credit terms and conditions apply to the account. Consider the annual fee, finance charges, balance computation method, and whether or not there is a grace period for purchases. See our Credit Card Terms (above) for more information on these and other important credit card terms.

Fees
Fees

Fees

Looking to maximize no fee balance transfers? Let’s review how you can properly use zero percent credit cards in connection with a debt repayment plan, or even as a way to make some extra money.

Be forewarned of the dangers of zero percent interest rate credit card balance transfers.

A reader wrote this to me recently “Back in 2001 I had about $3,000 in credit card debt. Around that time decided it was time to quit spending more than I was earning and pay off the debt completely. I had wised up. Specifically, I realized I was paying a bunch of money in interest by keeping that balance AND that extra outflow was keeping me from achieving other goals.

So, I came up with a plan to pay it off. It was a simple plan that included throwing any extra money left over each month at the debt. I decided a piece of the plan would be to used a zero percent credit card to help:

  • lower the amount of interest I was paying while I paid it off,
  • and motivate me to pay it off quicker (by the end of the term).

It worked. It took me about 6 months to pay it all off.

I’ve also used zero percent interest rate deals in other instances. I may go into these more in a later post, but I actually used a zero percent credit promotion when I got Lasik surgery and a zero percent credit card when I paid for some wedding costs. In both instances I never paid a dime in interest, I racked up a bunch of credit card rewards, and never had to tap into my short-term savings.” Well this is wonderful back in 2001, but lets deal with reality this is 2012, where the world is a different place, credit cards are different and financial and economic times are way different.

Why Use a Zero Percent Balance Transfer Credit Card?

There are a couple of good reasons to consider using zero percent balance transfer credit cards:

Paying Down Debt – The first and obvious reason is to help you pay off debt. While the transfer itself isn’t going to pay off your debt, making the transfer will mean you are paying less in interest payments while you pay down your debts. Make sense?

You might currently find yourself in a bunch of credit card debt. Not the end of the world. But maybe you’ve built up a balance over the years and you’ve just been paying the minimums. This is the best reason to use the zero percent balance transfer credit cards, in my opinion.

The above word of warning was not meant to discourage people who are in dire straights from using these cards. I realize people often turn to these cards when they are experiencing a temporary financial set back, like a job loss or injury. By all means use these cards to help float you over that down period. Just remember to be aware of the dangers.

There are lots of reasons that you can think of to try to use a balance transfer, but in the long run, unless you can consolidate debt and reduce your payments so that you can pay more towards the principle, just don’t do it, don’t play with fire.

Be a smart consumer and don’t walk into a problem.

Credit Card Past Due
Credit Card Past Due

Credit Card Past Due

The National Association of Bankers recently reported that late or delinquent payments dropped significantly in the 2nd quarter of this year. The Bankers and Politicians are all hailing this as a sign that the economy is improving. It’s amazing how easy it is to spin reports and numbers.

They could just as easily have reached the conclusion that the recession has gone on so long that most people that could not pay their bills have already felled behind before this current quarter. Or that perhaps, it’s just a onetime fluke because of the weeks in the quarter and the time of year, or perhaps the main reason, as it has taken the last two years of reduced spending to balance out so most people have reduced their credit card debt to where it is manageable. The last and worst conclusion is that this recession has gone on so long that many consumers have wiped out their savings, used up all their available credit and are just out of money. Unfortunately, there is a great possibility that the last conclusion is the most probable.

The current economic cycle has continued way beyond everyone’s imagination. The government continues to give false hope, make false claims and poor interpretations of market data and reports.

The data supplied by the National Banker Association stated the number of credit cards bills paid late fell to 3.22 percent from 3.4 percent in the first quarter. The average bank card delinquency rate over the last two years is 3.78 percent. The ABA’s composite ratio, which tracks eight types of closed-end consumer installment loans, was up to 2.88 percent.

We are all hoping that the current recession does not worsen, we all hope that it has bottomed out and that this holiday season will be the beginning a new cycle upwards. Building hope and instilling consumer confidence is an important engine to getting the locomotive started again.

A good holiday season, could mean that a lot of people hired as temporary seasonable labor will be asked to continue, even if for a short time. Manufacturers will get increased orders for the post holiday and they will begin to hire and purchase raw materials.

Let us all hope and pray for a great holiday season, don’t go crazy, but go out do your holiday shopping with a smile on your face, be part of the driving force to turn around our economy. Remember every time you spend money, you are helping keep someone employed.

Experian
Experian

Experian

There are three credit reporting agencies in the United States: Experian®, Equifax® and TransUnion®. A credit reporting agency gathers information from various providers and supplies credit data on individual consumers. Each credit reporting agency has its own formulas for calculating credit scores.

Companies that supply your credit information to consumer reporting agencies have to follow specific credit reporting rules, as listed under the federal Fair Credit Reporting Act. The act stipulates who can obtain a copy of your credit report and in what circumstances.

Experian currently provides consumer credit and identity theft services to more than 10 million subscribers; assists millions of consumers annually with disputes, fraud alerts and other related questions

Each year, the National Consumer Assistance Center assists millions of consumers who request copies of their credit reports or who question/dispute information in a report that a consumer feels may be inaccurate. Experian has years of expertise and firsthand insight into the type of questions consumers have about credit and the education they need to become better consumers of credit. We offer a robust program and have the proven infrastructure and connections in place to provide best-in-class service.

So where would you want to turn for education and understanding of your credit, your credit score, and your credit report. Who better then to teach you how your actions or inaction affect your credit rating and what creditors are looking for when they review your reports.

Experian’s Credit Educator Course covers:

Your Credit Report

Find out what’s included in a credit report, and see a sample Experian credit report. You’ll discover what kind of information lenders see when they review your credit history.

Check Your Credit Report

Review your credit report before making a large credit purchase, and make sure the information is accurate. If it’s not, you can dispute it online.

Your Credit Score

Find out what a credit score is, what it means and how you can improve it.

Improve Your Credit

Create a positive credit history. Learn tips on how to set up your credit history from the beginning and the importance of paying your bills on time. Need help? Learn where you can go for assistance.

Their course is all on easy to follow and understand videos.

If you need help or want to enroll in a credit course, visit an online site that will help enroll you.

Debt Collector
Debt Collector

Debt Collector

There are debt collectors and then there are debt COLLECTORS. When you fall behind on your debts, most companies have departments within their organization that begin to contact you. Some of this work is outsourced but they are trying to get you to pay your debt. They still represent the company who you owe money to and they will work with you and be understanding. At some point, your lender determines that you are now a deadbeat and that they will not be able to collect or collect easily on the balance you owe. At this point, they write down or write off your debt and sell the debt to a DEBT COLLECTION AGENCY. There can be a lot of confusion for debtors once collection agents and collection companies enter the picture. Even more confusion occurs if the debt is sold and resold a number of times to different collection companies.  These debt collection agencies buy and sell your debt based on its history and the possibility of collecting some sort of payment. Company A might only work on debts when they have a possibility of collecting 50-75% of the debt and will only hold them for so long at a given point they sell the debt to an agency who works on harder to collect debts. Eventually, there can be many people involved in the collection of your debt. When you decide to return a call or make a payment, each one of these companies will be glad to accept it, as they get to keep a portion of the money collected, regardless of who holds the actual debt.

In order to understand what’s going on with your debt, you may want to wrap your head around how the collection process actually works. All of us get defensive at that time, but let’s face the fact, you created the debt and the lender is now out their money. They are in the business of lending and collecting and they will not be in business long if they lend and do not collect.

The Process:

Most lenders do not turn accounts over to collections until at least 90 days has passed without payment. If you are trying to pay on your account or have at least made an effort, you are probably safe. If you at least communicate with your creditor you can keep your account out of collections. Do not avoid the phone calls. Be direct, be honest and they will work with you and they will limit their contact if you ask. What debtors don’t realize is that creditors do not want to have to give your account to a collection agent. Most of the time, the debt collector purchases the account for far less than is owed, meaning the original creditor takes a loss.

Once the debt is purchased from the creditor, the collection company begins attempting to collect on the debt. If your account has already been transferred to a collection agency, you will want to be aware of your rights. For instance, collectors are not permitted to harass or intimidate you, nor can they call you at inconvenient times, usually not before 8 a.m. or after 9 p.m.

The Settlement

if you want to pay the debt that is outstanding to the collection company, keep in mind that the collection account will still remain on your credit report for 7 years. When settling with the collection agency, you may be able to negotiate removal of the collection account from the credit report completely. This might be promised but in the world of computers and credit agencies rarely happens successfully, do not think that you will be able to restore your credit rating
Most important when negotiating however, is the settlement payment. Your account is already closed with the lender, your credit is already noted with the write off and late payments. The best you can do not is reducing the debt and arrange payment. The Collection Agency only paid pennies on the dollar and the easier they can collect the more negotiable they will be. Most times you can settle the balance for up to 50%off the debt, and even make payments. It never hurts to ask

Who do you pay when your debt gets sold to a collection company?

Things can get a bit confusing the longer you have avoided paying the debt and once it has been resold over and over again. A rule of thumb is to get the final offer in writing and make the payments based on the instructions in the agreement. In most cases your payment will be made to the Collection Agency that you are negotiating or settling with. Make sure you have everything in writing, not just an email note. Something official that refers to the account number, the creditor, the balance and the agreement, so if you are contacted by other collection companies you have the documentation to verify the agreement.

Face it, it is you who got into this mess, I know it may not have been your fault, but the fact that you ignored letters and phone calls is. Open communication is the best thing you can do and try to keep your debt from being sold work with your lender. If they do not take the write off or report and closing of the account your credit can remain in better standing.

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