You know all about your FICO score – it’s the credit score that mortgage lenders use when deciding if they’ll grant you a loan, and if so, the interest rate they’ll offer.
The higher your score, the less risk you present, and the lower the interest rate will be.
But the FICO score is only one of many. In fact lenders, insurance companies, and others use so many different scores that no one even has an accurate count. Small banks, utility companies, etc. use “off the shelf” scores, while huge banks pay experts to devise specialty scores just for their own use.
The behavioral score is one of those un-publicized scores. But it’s an important one, because it can determine your available credit and/or the interest rate you pay on your credit card.
Most consumers have a typical pattern of use. For instance, you may use the card for dining out. You could have a habit of eating at a moderately priced restaurant, or at a high dollar establishment. You may also use the card for clothing purchases – and typically buy at discount stores or moderately priced department stores. Or you may always shop at exclusive boutiques.
Your credit card issuer watches this, and if you do something that doesn’t fit the pattern, they notice. This can be a safeguard for you because often an unusual purchase or group of purchases will trigger a phone call to you to make sure that you are the one using the card.
One consumer I know in Washington State received a call recently asking if he had just made a large purchase at a store in Florida. Of course he had not, and the charge was rejected. This safeguard is the reason why credit cardholders are advised to let their card issuer know in advance when they plan to use their cards while on vacation.
But the same watchfulness that can safeguard your account can also cause you trouble.
If you have established a pattern of using your card for expensive clothing or 4-star restaurants, and you suddenly begin using it to buy groceries, your card issuer will assume that you have had a reversal of fortunes, and your behavioral score will change.
They’ll further assume that you are becoming more of a risk, and they’ll lower your credit limit. Then, since they believe you might eventually default, they’ll raise your interest rate.
Nearly everyone is interested in saving money these days, and many are tempted by the ease of saving through spend-to-save credit cards. But are they really the path to financial prosperity?
Probably not, say financial advisors. In fact, this plan can actually encourage higher spending and more debt.
These plans, such as Bank of America’s “Keep the Change” and Wachovia’s “Way2Save” simply round up purchases to the next dollar and deposit the difference into a savings account.
It sounds good, and it could be good for consumers who pay their balance in full each month. But since savings accounts are now paying less than 1% interest annually, and credit cards charge an average which is now around 12%, or 1% per month, it’s a very bad plan for consumers who carry a balance.
It doesn’t make sense to pay 12% per year on money that will earn less than 1%. You’re going backwards.
But the story gets even worse, because these credit card plans have hidden fees. Keep the Change charges a $5 monthly maintenance fee on their savings accounts – a fee which may be waived if customers maintain a minimum daily balance of $300 or transfer at least $25 from checking into savings each month. Way2Save has no minimum balance, but requires consumers to use the card at least monthly in order to avoid the $5 fee.
The cards themselves may carry an annual fee, further eroding the savings account.
Financial experts advise that rather than putting dimes and quarters into a savings account, consumers who carry credit card debt should be using those extra dollars to pay down their debt. That paves the way for greater savings as interest payments go down.
Another, better way to save, is to change your buying habits and begin recording expenditures.
According to Jerrold Mundis, author of “How to Get Out of Debt, Stay Out of Debt, and Live Prosperously,” people who pay with plastic will spend ten to fifteen percent more than those who buy with cash. With a pre-set number of dollars in hand, consumers are far less likely to spend on impulse purchases, opting instead to say “I don’t really need that.”
Additionally, those who actually record every expenditure for a month or more are likely to cut their spending by five to ten percent. Rather than charging more on a credit card to force themselves into savings, they’re seeing “leaks” in their budget that can be easily plugged. That paves the way for actual savings.
The idea of getting cash back for using your credit card sounds pretty good to most of us. It’s like free money! But, whether or not you get that “free money” depends upon the fine print in your credit card agreement.
That fine print reveals many terms, such as the annual fee you might pay for using the card. You need to do the math to see if you’ll really come out ahead.
For instance, if your credit card gives you 2% back on all your purchases and the annual fee is $29, you’ll have to charge $1,450 worth of goods before you break even.
But some cards don’t offer cash back on all purchases, and some have a tiered schedule. You might get only 1% back at first, then see an increase after you’ve spent more. Some can go as high as 5%.
Next look at the interest rate. If you pay your bill in full each month, this isn’t a concern, but if you carry a balance from month to month, your interest rate could wipe out all the savings from cash back.
The next bit of fine print to read is how and when you’ll receive your cash back. Do you have to spend a set amount in a certain time frame in order to receive it? Some cards will only give you money back if you’ve reached a pre-set threshold. If you fall short by even a dollar, your cash back dissolves into nothingness.
Some cards also limit the amount you can earn. So if you’ve been planning to pay for absolutely everything with your card and pay the balance in full each month – just to get money back – you may be in for a surprise.
Credit card issuers may also restrict the stores you can choose if you want cash back.
Your card may disallow groceries purchased at Wal Mart or Whole Foods because they don’t consider them to be “grocery stores.” The same goes for fast foods and gasoline – you may have to buy from their list of approved vendors.
The bottom line, as always, is that it is in your best interests to read and compare. So don’t fall for a flashy ad if you want a cash back card that meets your needs. Click here to compare cards and choose the one that’s right for you.
When you’re in college you may believe you don’t need a student credit card. You don’t really want to go into debt any farther than those student loans, so you live on what you can earn.
That’s good. You shouldn’t go into debt. But you should own a student credit card, and you should apply for it now, before the new rules go into effect.
Once February rolls around, students will be severely limited in their access to credit cards, but those cards you have now will not be affected. Getting one or more now means less hassle.
But why do you want it?
Simply because you’ll need the credit history when you graduate and get out into the world of work.
Your first step when you leave college will probably be to find employment – and employers look at credit reports. If you have no credit, you’ll have no report. You may be overlooked for someone who not only has a credit report, but has a good report.
Next, most graduates want to find a place of their own to live. And guess what? Landlords pull credit reports. They want some assurance that you’re the kind of responsible person who will pay the rent on time every month. With no credit report, all they have is your verbal promise.
After that you might want a car to take you to and from that new job. And you know that before a car dealership will give you a car loan, they’ll look at your credit report.
So – the student credit card you get today is not for the purpose of spending money you don’t have. Its purpose is to help you begin to build a solid credit reputation and high credit scores.
Get it, put it in your wallet, and take it out only occasionally to use for a purchase that you will be able to repay when the statement arrives. You should use the card at least once per calendar quarter.
Be careful to charge less than 30% of your available credit line. If you have only $200 – never let your balance owed go over $60.
By using the student credit card sparingly and paying the balance each month, you’ll slowly build a credit history that will contribute to high credit scores by the time you graduate. Then, when your classmates are paying high interest for car loans and new credit cards, you’ll enjoy preferred treatment as a consumer with an already established good financial reputation.
Prepaid credit cards are gaining in popularity as consumers are moving away from carrying heavy debt. Some are cards for specific stores – such as gift cards – but many are using pre-paid cards from Visa and Mastercard.
Pre-paid credit cards are really nothing more than debit cards, because you’ve put the funds in yourself and you aren’t actually “charging” anything. However, they can be used anywhere credit cards are accepted.
But what’s the point, when you have to pre-load them with your own money?
Carrying plastic is a convenience, and some feel it is safer than carrying cash. Plus, there are some purchases that simply can’t be made with cash. On line, for instance. Some retailers will accept an electronic check, but not all will.
And for consumers who can’t get a checking account because of a history of bounced checks, they’re the only way to make on line purchases.
Who else uses pre-paid credit cards?
Employees whose employers pay them via direct deposit on their prepaid cards.
Gift givers who want the gift recipient to have a choice of stores.
Parents of college students who want to hold down their child’s spending, but like the convenience of being able to “re-load” the card when funds get low.
Pre-paid credit cards are a little different from retailer’s gift cards in that they can carry fees. Thus it pays to shop around and compare cards before you choose.
The fees charged can vary widely and can mount up. Some card issuers charge for application, activation, and annual or maintenance fees. Some also impose a fee each time the card is used, each time you call for customer service, each time you make a balance inquiry at an ATM, and any time you request paper statements.
If you opt for a pre-paid credit card, be sure to register it when you receive it, and record the registration number where you’ll be able to find it easily. When you register the card you’ll be eligible for fraud protection if the card is lost or stolen. These cards carry zero liability policies, but only if you notify the card issuer right away.
As with all credit and debit cards, you could experience “holds” when you rent a car, check into a hotel, or fill up at the gas pump. Be sure you have enough money to cover both the hold and your purchase.
Disagreements over the use of credit cards has led more than one couple down the path to divorce. One reason for that is a failure to communicate and come to an agreement about their use before trouble can begin.
Each of us has a difference tolerance for debt, so that’s the place to start. Look at your income, your other monetary obligations, and the amount of money you have left over each month. Then decide how much you can allow for payments on credit card debt.
Once you know the numbers you’re dealing with, you can try to come to an agreement about how much credit card debt is acceptable, and how much would be too much. Keep in mind the other ways you each like to spend money, and remember that paying the minimum balance on a credit card each month will keep you in debt for a long, long time.
Now decide when and how your cards will be used. For some, paying for gasoline and other miscellaneous expenses is a good bookkeeping move, while for others it means spending a little too much each month – and a gradual increase of debt when there isn’t enough money left at the end of the month to pay the balance.
Maybe it’s better to use the card only for major expenses or just keep it on hand for emergencies. You need to decide together.
Rewards points can become another point of disagreement, so if you have a rewards credit card discuss how you’ll “cash in” well ahead of time. One of you may be dreaming of using those points to get some cool new toy, while the other has been looking forward to turning them into cash to pay down your balance.
Someone needs to be the bookkeeper. Too often, both parties think the other one will keep track of the bills and make the payments on time, so neither one does. Then each blames the other for those late payment charges on the next statement.
Whoever is the most organized should be responsible for this task. However, both of you should review the bills and be aware of how you are jointly spending your money.
Couples should be open with each other about spending, because one partner’s excess debt will have a negative effect on the marriage. However, they should still have individual credit card accounts and individual credit worthiness.
No one wants to contemplate death or divorce, but they do happen, and the partner left behind still needs good credit. That doesn’t mean that the “bookkeeper” can’t be responsible for making sure the payment is made on time on all accounts.
Credit card stocks rose recently as a result of reports that the number of charge-offs had slowed, but analysts are warning that this is merely a seasonal lull. The lull is likely the result of consumers receiving their income tax refunds and using that money to try to catch up with overdue accounts. Social Security recipients also received “stimulus checks” of $250 each – and those may have slowed the rate of delinquencies.
Accounts 180 days overdue generally turn into charge-offs, which are then handed to credit collection agencies. July reports showed that delinquencies 180 days overdue had dropped, but delinquencies overdue 30 to 59 days have increased. To many analysts, this is a forecast of charge-offs to come.
Depending upon the analysts, predictions are that charge-offs will rise from a current rate of about 10% to as much as 18 or 20%. Some, who are more optimistic, predict a peak of about 11% by early 2010. Charge-offs at some banks already reached 13.8% in June.
Charge-off rates have tripled since January 2007 – keeping pace with the unemployment rates. Unemployment, which was reported at 9.3% in June, is now the highest since 1983, causing many consumers to make tough decisions about paying bills. Unsecured debt is, of course, the last to be paid when income doesn’t cover all monthly expenses.
These numbers include credit card accounts which were included in consumer bankruptcy proceedings, along with those accounts which consumers have simply stopped paying. They do not include accounts subject to “workout” plans created individually by consumers with their credit card issuers, or with debt management plans administered by credit counseling agencies.
If your credit card account is overdue, or nearing the charge-off stage, consider a debt management plan.
Debt management plans call for some voluntary concessions from the lender, but allows for complete repayment of the loan. Thus, debt management plans allow consumers to regain control of finances without destroying their credit ratings.
Consumers should be aware that the legitimate Debt Counseling agencies do not charge for their basic services. Signing up with a company that offers to wipe out your debt for a fee is simply another scam, designed to part consumers with whatever funds they do have.
Rather than respond to an ad that arrives in your mailbox or you e-mail in-box, contact the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling to find a counselor near you.
If you have a small business, yes – you need a business credit card.
Business cards often carry lower interest rates and higher credit lines than personal cards, but that’s not the only reason. In order to qualify, you’ll have to be set up as a business, with a business name and possibly an Employer Identification Number.
You’ll need a business address and phone number – but these can be at your home if you are running a legitimate business from your residence. Many people such as building contractors, excavators, landscape artists, and freelancers do have offices in their homes.
You’ve probably read enough about taxation to know that the interest on your personal credit cards is not tax deductible. But interest on business expenses is deductible, so if you carry a business credit card and use it for nothing except business expenses, the interest you pay will be a deduction. And when it comes to tax time, every deduction counts.
If you slip and use that business card to buy the kids’ new shoes, you’ll be out of luck. So if you may need to carry a balance, be careful not to use that credit card for any kind of personal expense. If there’s an expense that could be viewed as personal – such as concert tickets or a restaurant meal – be sure to document the event in your day planner. Note the names of the clients or customers you were entertaining, along information about the business discussion that took place.
Secondly, business credit cards often give benefits such as year-end accounting. You can see at a glance how much you spent on gasoline, office supplies, entertainment, etc. If you give credit cards to your employees for business use, the reports will also tell you how much each employee has spent, and for what.
Your monthly statements are also broken out to show how much each person spent, and where they spent it. This is an excellent way to monitor employee activity and rest assured that your credit is not being used inappropriately.
Then there are the rewards. When business cards offer a rewards program, you get benefits for making those purchases that are essential to your business. Who doesn’t want a little cash back on necessary expenses?
Major credit cards aren’t the only ones to offer benefits to cardholders. Retailers like Staples™ will send you a rebate check at the end of each month based on the previous month’s charges – and will often offer extra cash back for buying their brand. They also mail out “free” coupons to entice cardholders to try new products.
P.T. Barnum said there was a customer born every minute, but considering the threats to consumers, sometimes it seems like there’s a scammer/thief/crook born every minute. Unfortunately, credit cards are one of their prime targets.
One of the latest scams is “credit card shaving.” In this scam, the thief randomly tries 16-digit card numbers until one of them shows as valid. Then, he “shaves” the numbers from a pre-paid card and replaces them with the guessed number.
This sounds like a lot of work, but with the right equipment, putting new numbers on an old card can be done in a manner that most store clerks won’t notice. To prevent the clerk from simply “swiping” the card, the thief disables the magnetic strip on the back, forcing the clerk to key in the numbers.
Someone can be using your card without it ever leaving your wallet.
This is one reason why you must check your credit card statements as soon as they arrive each month, and must notify your card issuer immediately when you spot a bogus charge. Then file a police report, because most credit card companies won’t remove the charges without one.
Another new scam involves stealing your cards from your mailbox. You know that the sticker on new cards tells you to activate the card from your home phone. This was a safety feature to prevent a mail thief from using stolen cards.
Now a new website offers the means to place a call from any phone and make it appear to be coming from any other phone. All the thief has to do after stealing your card is look up your phone number in the local directory.
If the thief plans on long-term use of your account, he or she can contact your credit card company and fill out a change of address so you get neither the card nor the statement showing an ever-enlarging balance due.
If you’re expecting a new card in the mail – either on a new account or a date extension on an existing account – make sure to watch for its arrival. If it doesn’t show up in a reasonable amount of time, call your credit card issuer to see if it has been sent. If so, have them check to see if it has been activated and if there are any charges.
Along with notifying your card issuers and law enforcement, you should notify the credit bureaus immediately when a credit card has been compromised.
De-activate the affected credit card numbers and get new cards, but ask your card issuer to do so in a way that shows you are merely changing account numbers.
Americans cite many reasons why they need only one card. One of the major reasons is that they’re afraid of the temptation presented by multiple lines of credit. If they have more credit, they might use it.
This is a valid concern, and those who cannot resist spending probably shouldn’t have any credit cards. But life is certainly safer and more convenient when you do.
Some experts recommend keeping one credit card with a zero balance – and keeping it in a safe deposit box for emergency use only – such as after a robbery or house fire. This was probably good advice before the banks began closing unused accounts. Now you do need to take the card out and use it at least quarterly or you’re apt to find it has disappeared.
Keeping one credit card exclusively for on line purchases is a safety feature as well. Should your account be compromised, you’ll know which card numbers were stolen and can take action quickly. It’s also easy to spot a bogus charge on a statement with few entries.
Rewards are another good reason for multiple accounts, because different cards offer different rewards. A consumer who plans ahead and keeps track of offers can reap good rewards by using the correct credit card for each purchase.
Along with the rewards, keeping like purchases together on one card helps with record-keeping. It also makes it instantly clear to you if you’re spending more than normal on some part of your budget and need to cut back. Seeing 8 separate charges at the local CD outlet, movie theater, or restaurant might tell you that you’re indulging yourself a little too much!
Multiple cards also boost your credit scores - as long as you keep use under control. Don’t let your charges on any one card rise above 30% of the credit limit in any one month. If you slip and go above the 30%, go on line and make a payment before your next statement date. Of course, having multiple credit cards and credit lines makes it easier to keep a low balance on each of them.
For many, having multiple cards with different due dates makes budgeting and bill-paying easier.
Lastly, if you have multiple cards and one card issuer suddenly decides to cut your credit line or raise your interest, you’ll have somewhere else to turn. You can even transfer balances if another credit card has friendlier terms.
You know all about your FICO score – it’s the credit score that mortgage lenders use when deciding if they’ll grant you a loan, and if so, the interest rate they’ll offer.
