Credit Card Guide

Learn basic facts and information about credit and credit cards before you apply for one.

Establishing a Credit History

Suppose you haven’t financed a car loan, a computer, or some other major purchase. How do you begin to establish credit? First, consider applying for a credit card issued by a local store and use it responsibly. Ask if they report to a credit bureau. If they do — and if you pay your bills on time — you’ll establish a good credit history.

Second, consider a secured credit card. It requires that you open and maintain a bank account or other asset account at a financial institution as security for your line of credit. Your credit line will be a percentage of your deposit, typically from 50 to 100 percent. Application and processing fees are not uncommon for secured credit cards. In addition, secured credit cards usually carry higher interest rates than traditional non-secured cards.

Third, consider asking someone with an established credit history — perhaps a relative — to co-sign the account if you don’t qualify for credit on your own. The co-signer promises to pay your debts if you don’t. You’ll want to repay any debt promptly so you can build a credit history and apply for credit in the future on your own.

A positive credit history is an asset, not only when you apply for a credit card, but also when you apply for a job or insurance, or when you want to finance a car or a home.

Qualifying for a Credit Card

If you’re at least 18 years old and have a regular source of income, you’re well on your way to qualifying for a card. But despite the invitations from card issuers, you’ll still have to demonstrate that you’re a good risk before they grant you credit. The proof is in your credit record. If you’ve financed a car loan or other purchase, you probably have a record at a credit reporting bureau. This credit history shows how responsible you’ve been in paying your bills and helps the credit card issuer decide how much credit to extend.

Before you submit a credit application, get a copy of your credit report to make sure it’s accurate. Contact the credit bureaus listed in the telephone directory under "credit" or "credit rating and reporting." Because more than one credit bureau may have a file on you, call each until you locate all the agencies maintaining your file.

Anyone who takes action against you in response to a report supplied by a credit reporting agency — such as denying your application for credit — must give you the name, address and telephone number of the credit bureau that provided the report.

Credit Responsibility

While a credit card makes it easy to buy something now and pay for it later, you can lose track of how much you’ve spent by the time the bill arrives if you’re not careful. And if you don’t pay your bill in full, you’ll probably have to pay finance charges on the unpaid balance. What’s more, if you continue to charge while carrying an outstanding balance, your debt can snowball. Before you know it, your minimum payment is only covering the interest. If you start having trouble repaying the debt, you could tarnish your credit report. And that can have a sizable impact on your life. A negative report can make it more difficult to finance a car or home, get insurance, and even get a job.

Finding the right credit card

Finding the best card for you requires research. You should determine what features are most important to your financial situation and spending style, measuring them against the costs associated with each offer. Factors such as application fees, annual fees, finance charges, accrued interest on the deposit, available line of credit and minimum savings deposit are some of the most important considerations.

Kinds of Credit Accounts

Credit grantors generally issue three types of accounts. The basic terms of these account agreements are:

Revolving Agreement
A consumer pays in full each month or chooses to make a partial payment based on the outstanding balance. Department stores, gas and oil companies, and banks typically issue credit cards based on a revolving credit plan.

Charge Agreement
A consumer promises to pay the full balance each month, so the borrower does not have to pay interest charges. Charge cards, not credit cards, and charge accounts with local businesses often require repayment on this basis.

Installment Agreement
A consumer signs a contract to repay a fixed amount of credit in equal payments over a specific period of time. Automobiles, furniture, and major appliances often are financed this way. Personal loans usually are paid back in installments, too.

Types of credit banks provide

There are two types of credit: secured and unsecured. With secured credit, purchased goods serve as collateral to guarantee the debt. If you do not make a payment, the creditor can legally take possession of the goods you purchased.

Unsecured credit, like most credit cards, is based on your promise and signature to repay the debt without committing your saving or other collateral as a guarantee.

Types of credit cards

Travel and Entertainment, (American Express and Diner’s Club) are usually used by businesses and consumers for travel and entertainment expenses. Card holders pay an annual fee.

Bank cards (MasterCard, Visa, Discover and Optima) are issued by individual banks. Each bank decides credit limits, annual fees, terms and conditions. Bank cards are all purpose cards and can be used to pay for a variety of goods and services.

Company and Retail Store Cards (Sears, Bloomingdales, Mobil, Exxon, etc.) are cards used for retail purchases at specific store chains or gas station chains and usually carry no annual fee. They sometimes have higher interest rates than bank cards. Terms and conditions may vary.

Secured Credit Cards

Benefits of Secured Cards:
If you have no credit or a negative credit history, it can be difficult to obtain an unsecured credit card. But, what you may not know is that you may be able to qualify for a secured credit card, which can offer many of the same benefits as an unsecured card. A secured credit card is much like a secured loan. You are required to deposit money into a savings account or a certificate of deposit as collateral for a line of credit. The card has the same appearance as an unsecured card and usually offers the same convenience and charging privileges as a traditional unsecured credit card.

While almost anyone can apply for a secured credit card, there are some limitations. Most issuers do not accept applicants that have been convicted of credit card fraud, have outstanding liens on their property, or are filing for bankruptcy.

Application fees and/or deposits

In most cases, an application fee is required by the insurer, which adds to the cost of obtaining a secured card. The fee is usually non-refundable, even if you're not accepted by the issuer.

Once you're accepted for the card, you are required to make a deposit into a savings account or certificate of deposit as security. The average minimum deposit required can run around $300. The amount of money you deposit should depend on your income and the line of credit desired. However, some insurers will offer credit the same or greater than the amount deposited; some others may offer a credit limit lower than the amount deposited.

Most issuers will pay you interest on your security deposit. The more money you wish to or are required to deposit, the more important it is to have a card that offers respectable interest payments.

Like most secured credit cards, insurers of unsecured cards charge additional fees for use of the card and services associated with the card, such as, cash advances, late payment fees, and fees for charging over the limit or non-sufficient funds. Carefully review all information provided by the issuer to determine how and when such charges will be incurred.

If Your Application Is Denied

If you’re turned down for a card, ask why. It may be that you haven’t been at your current address or job long enough. Or that your income doesn’t meet the issuer’s criteria. Different credit card companies have different standards. But if you are turned down by several companies, it may indicate that you are not ready for a credit card.

If you’ve been denied credit because of information supplied by a credit bureau, federal law requires the creditor to give you the name, address and telephone number of the bureau that supplied the information. If you contact that bureau within 60 days of receiving the denial, you are entitled to a free copy of your report. If your file contains accurate negative information, only time and good credit habits will restore your credit-worthiness. If you find an error in your report, you are entitled to have it investigated by the credit bureau and corrected at no charge.

You should dispute any inaccuracy in your report with the credit bureau and also with the company that furnished the information to the credit bureau.

Getting the best credit card deal

Fees, charges, and benefits vary among credit card issuers. When you’re choosing a credit card, shop around.

Credit card tips

Once you get a card, sign it immediately so no one else can use it. Note that the accompanying papers have important information, such as customer service telephone numbers, in case your card is lost or stolen. File this information in a safe place.

Call the card issuer to activate the card. Many issuers require this step to minimize fraud and to give you additional information.

Keep your account information to yourself. Never give out your credit card number or expiration date over the phone unless you know who you’re dealing with. A criminal can use this information to steal money from you, or even assume your credit identity.

Keep copies of sales slips and compare charges when your bill arrives. Promptly report in writing any questionable charges to the card issuer.

Don’t lend your card to anyone, even to a friend. Your credit privilege and history are too precious to risk.

Federal Protections

Federal law offers the following protections when you use credit cards:

Errors On Your Bill

You must notify the card issuer in writing within 60 days after the first bill containing the error was mailed to you. In your letter, include: your name; account number; the type, date, and amount of the error; and the reason why you believe the bill contains an error. In return, the card issuer must investigate the problem and either correct the error or explain to you why the bill is correct. This must occur within two billing cycles and not later than 90 days after the issuer receives your billing error notice. You do not have to pay the amount in question during the investigation.

Unauthorized Charges

If your credit card is used without your authorization, you can be held liable for up to $50 per card. If you report the loss of a card before it is used, the card 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 for unauthorized charges is $50. You should be prompt in reporting the loss or theft of your card to limit your liability.

Cancelling your credit card

If you wish to cancel your secured card, do so in writing. Credit card issuers have different policies concerning the amount of time before you receive your refund. Also, keep in mind that if you have an outstanding balance, most card issuers will use your security deposit to pay the remaining balance.