Credit Card Basics

Credit Card Basics

You've probably received offers for credit cards. Chances are, you've gotten letters in the mail or you've picked up a credit card application at the campus bookstore. In this section, you'll find out what credit is and why it’s important.

What is credit?
Credit is a privilege and a convenience. Credit lets you charge a meal on a credit card, pay for an appliance on an installment plan, take out a loan to buy a house, or pay for schooling. Credit allows you to make a purchase without ready cash.

A credit card enables you to buy things now and pay for them later. You get credit by promising to pay in the future for something you receive in the present. Credit usually costs something, and what is borrowed must be paid back

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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 help. 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.

What is a credit report?

When you apply for credit, the lender reviews your credit report before approving your application. The three major credit reporting 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 report contains 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 the credit report.

Why is it important to establish a good credit history? 

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 that are 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 before 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. That's why it is so important to establish a positive credit history.

How do I establish a good credit history?

In short, it’s 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.

Establishing Credit

Check out this section for tools, tips, and advice on choosing and qualifying for a credit card, building your credit history, and ways in which you're responsible for wise credit use.

Choosing a credit card
Today's consumers are presented with a wide array of credit card choices—cards with low annual percentage rates, cards with no annual fees, rebate cards, gold cards, platinum cards, and so on.

So how do you choose one? Before selecting a card, be sure you know which credit terms and conditions will apply to the account. The Truth in Lending Act is a federal law that promotes the informed use of consumer credit by requiring disclosures about its terms and cost, using specific terminology. In short, the Truth in Lending Act allows the consumer to "shop around."

Qualifying for a credit card
If you are at least 18 years old, or 21 if a permanent resident of Puerto Rico and have a regular source of income or savings, you're on your way to qualifying for a credit card. But you'll still have to demonstrate that you are a good Customer. The proof is in your credit history, which lists the amount of credit you have received and how faithfully you've paid it back.

If you are a full-time student, make sure to include that information on your credit application. Creditors often assign full-time students lower initial credit lines to start their credit files. As you advance through college and graduate school, you can always request increases to your credit line.

Before you submit a credit application, get a copy of your credit history to make sure it's correct. Contact a credit bureau listed in the Yellow Pages under "credit rating and reporting." To order a free copy of your credit report, contact Equifax, Experian, or Trans Union.

Building your credit history
How do you establish your credit history? Even if you've never made a major purchase, there are ways to start building a good credit history:

1. Open a checking account or savings account, or acquire a debit card. These do not create your credit file, but their existence will indicate that you have money and show something about how you manage it.
2. Apply for a department store credit card or a major credit card (such as a MasterCard®, Visa®, or American Express® Card), and use it responsibly. Pay your credit card bills on time.
3. If you don't qualify for credit on the basis of your own credit file, ask someone with an established credit history (like a parent) to co-sign your application. Remember, the co-signer promises to pay your debts if you don't.

Being responsible 
Because credit cards make it easy to purchase things now and pay later, it's easy to lose track of how much you've spent. Make sure you pay all your bills on time, and only get the credit cards you need—don't get a card just because the issuer is giving away a cool reward.

To establish and maintain good credit, pay at least the minimum amount due on each account every month, and pay on time. Allow five to seven business days for payments made by mail.

Use your credit card wisely, and you'll have a very beneficial financial tool. Use your card unwisely, and you'll run up credit card debt you can't afford. Nothing is easier than charging small things here and there, only to find yourself with a large bill you can't pay.

There are easy ways to keep your spending on track. Perhaps the easiest is to record your credit card purchases in a notebook. There is also a wide variety of available financial software to help you manage your finances. Lastly, take advantage of services your financial institution offers. Through online banking, for instance, you can see your account activity on a daily basis and even arrange to make electronic payments.

Maintaining Good Credit

In this section, you'll learn how to build a healthy credit profile, how to keep your debts manageable, where you can go for help if your debts become too high, and what to do if you're denied credit.

Build a healthy credit profile 
How you handle your credit cards and other loans affects your creditworthiness. Remember to use your credit responsibly and be sensitive to the terms of the payment agreements you made when you established your accounts. Whether you choose to pay the total outstanding balance on your bills each month or just the minimum payment due, your payment must reach the financial institution or business before the cutoff time on the payment due date. If that time of the month is not convenient because it doesn't coincide with your paychecks, contact the creditor to see whether your billing cycle can be changed. Or adjust your budget accordingly.

Notify creditors of a change of address 
Whether you're moving across town or down the hall, make sure your creditors always have your most recent address so that you'll receive your billing statements promptly. Some creditors allow you to notify them of your change of address online. This also includes temporary address changes (like those during breaks or between semesters).

Manage your debts—reduce them too! 
"Where did all my money go?" The easiest way to find the answer is to take the time to establish a monthly budget. Differentiate between the things you "need" and the things you "want." Start with your fixed expenses or "needs"—like rent, food, utility bills, phone bills, car loans, and insurance payments. Then figure in variable "wants"—like clothing, eating out, and entertainment. Subtract your expenses from your income, and you have your starting point. If the sum is below zero, it's time to reduce your expenses by cutting out any unnecessary spending on "wants." You'll be amazed how much money you'll save by investigating all opportunities for discounts.

Some tips for spending less:

• Ask your Student Affairs Office for a list of merchants who give student discounts.
• Before you make a purchase, ask the merchant whether a student discount is available.
• Review Web sites like buy.com before making any major purchases. They may offer the item you're purchasing at a lower price.
• Think before you purchase. How many hours of work at your summer job will it take to pay for what you're buying? Don't spend more than you can pay off in a reasonable time.
• Look for supermarkets that offer "clipless coupon" store cards. When presented to the store cashier, these cards enable you to take advantage of special pricing and bonus buys on advertised items.
• Instead of running to the local convenience store to satisfy your late-night cravings, consider a 24-hour grocery store. Items in grocery stores are generally far less expensive than items in convenience stores.
• See whether you qualify for scholarships. Check out fastweb.com for a comprehensive listing of what's available.

Find why your credit application is denied 

If you've been denied credit because of information supplied by a credit bureau, federal law requires the creditor to give you the name of the bureau that supplied the information. If you contact that credit bureau within 60 days of receiving the denial, you are entitled to a free copy of your credit report.

If you find an error in your report, you are entitled to have it investigated by the credit bureau and corrected at no charge. However, if negative information on your credit file is accurate, then only time and responsible credit habits can help restore a bad credit history.

If the creditor informs you that your credit application was declined because of an "insufficient credit file" and you are a full-time student, you may want to contact the creditor and make sure that the company knows you are a full-time student. It might agree to give you a lower initial credit line to start your credit file. As you advance through college and perhaps go on to graduate school, you can request to have your line increased.

It's important to note that, under the Equal Credit Opportunity Act, financial institutions must make credit equally available to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age, and without regard to whether all or part of the applicant's income derives from public assistance, or if the applicant has in good faith exercised any right under the Consumer Credit Protection Act.