Should I Get a Credit Card to Build Credit?

A friend of mine is thinking about buying a house, in fact he’s been thinking about buying a house for a couple of years now.  However, the last time he applied for a mortgage, he didn’t have enough credit, so his mortgage broker suggested he get a credit card or two to help build his credit score.  Unfortunately, my friend didn’t know much about credit scores, credit cards, and such, so he went out and applied for multiple cards… and was rejected multiple times.

And that actually hurt his credit far more than he realized… his credit score plummeted almost twenty points.  All because he applied for multiple credit cards that were actually “out of his credit league.”   Had he been smart, he would have checked his credit score first, and then only applied for credit cards that he was likely to qualify for instead of the top tier cards that require excellent credit for approval.

What about you?  Do you know enough about your credit score and credit cards to make smart choices when applying for credit cards?  And, once you get approved for a credit card, do you know all the ins and outs?  Have you read all the fine print?  Do you understand it?  If not, you might want to spend a little time learning a little more about credit cards and the benefits and the negative connotations that go with them.  That way, you won’t be like my friend and have to learn the hard way.

Remember, using your credit cards responsibly can help you reach those big financial goals, like your first home, that new car, or even something as simple as this year’s vacation.

How do Credit Cards Work?

A credit card is really nothing more than a simple plastic card, equipped with a security chip, that is linked to a line of credit with a financial institution.  Whenever you swipe your credit card to pay a bill, make a purchase (online or in person), or get a cash advance from an ATM, you’re actually borrowing money from the financial institution.  While you don’t have to repay the full amount right away, if you don’t pay within a certain amount of time (usually 25-30 days from the date of purchase), you’ll have to pay interest on the unpaid balance.  If the purchase is large enough, and if you take a long time to pay off the balance, the interest charged against the initial purchase can be significant as it will accrue against the amount that remains unpaid every month until you’ve paid it in full.

What are the Benefits of Using a Credit Card?

One of the biggest benefits of having a credit card is so that you can handle large or unexpected expenses, such as car repairs, home repairs, and other emergencies that crop up when you don’t have the cash to pay all at once.  With a credit card, you can manage the expense by paying over time.  (Just be sure that you pay it off as soon as you can.)

Some credit cards also offer rewards, such as cash back, travel rewards, and other perks, just for using the card to make purchases.  Again, be sure to pay the balance off as soon as you can because the monthly interest charges can easily outweigh any rewards you may earn.  Some credit cards also offer “purchase protection,” where items that you have purchased may be refunded if it’s defective or damaged.  And of course, nearly every credit card offers protection against fraudulent use.  (If yours doesn’t, you need to get another credit card!)

But, for a certain group of people, the biggest benefit of a credit card is the opportunity to build (or rebuild) a good credit history.  Using your credit card to make purchases, paying your credit card bill on time every month, and keeping your total credit usage at or under 30% will demonstrate responsible credit usage, and this will be reflected on your credit report.  Available credit and payment history are the two most significant factors in calculating credit scores, and lenders consider a solid payment history when you apply for new credit or a loan, so that a healthy history of on-time payments can help you get approved with lower interest rates than if you have had one or more missed payments.

What are the Risks of Using a Credit Card?

Probably the single biggest risk of using credit cards is how easy it is to get in over your head, spending money you don’t have, and strapping you with monthly payments that you can’t afford (often for years).  For every month that you can’ pay your balance in full, the interest accumulates and increases that debt.  The best way to avoid getting in over your head is to only use your credit cards when you can pay the balance in full, or when you have an unexpected expense (such as car trouble) and need to pay for the expense over time.  Just be sure to have a repayment plan and stick to it!

There are other risks with credit cards, as well.  Paying late, missing payments, carrying a balance over 30% of the total available credit, opening and closing too many accounts can all have a negative effect on your credit score, so use your credit cards responsibly.

What Credit Cards Should I Apply For?

Before you apply for a credit card, check your credit report and your FICO score to see what kind of credit card you’re most likely to be approved for when you apply.  Remember every time you apply for a credit card, the credit card issuer reviews your credit report.  This causes a “hard inquiry,” which can negatively affect your credit score, especially if you apply for too many credit cards all at once.

(Prequalification on the other hand would be a soft inquiry, since it is not firm approval, and provides an estimation of what you could qualify for. Not all prequalifications will lead to approval, since other factors such as income would be additional factors for the approval process.)

Irresponsible Credit Card Habits

Whether your credit is extremely good or extremely bad or somewhere in between, it’s really easy to fall into the habit of using your credit cards irresponsibly… whether it’s that shopping spree you just couldn’t resist or that cash crunch you’re trying to avoid, irresponsible use of your credit cards can really get out of control if you’re not careful.  And those bills can be difficult, if not nearly impossible to pay off, and it really hurt your credit score in the long run.  So, it pays to be smart when it comes to credit and credit cards.

Here are a few smart rules to stick to when it comes to using your credit cards:

  • Plan ahead when you’re going to use a credit card.  What will you use the card for?  How much will you allow yourself to charge?  And, more importantly, what time frame will it take to pay the balance off?  Purchases made with a credit card should be carefully considered… Are you buying a new television?  New tires?  A new fall wardrobe?  If you’re using the card to buy something that’s on sale, will the interest charged against the purchase ultimately cost more than if you’d waited and purchased the item with cash instead, even if you have to pay full price?
  • Unless you’re using your credit card to earn rewards and paying the card off every month, don’t use your credit card for everyday purchases like food, gasoline, utility bills, or entertainment.  Not only will you be paying on the card long after you’ve used up the consumable goods, but you’ll be paying interest, too!  See if you can’t cut a few corners elsewhere in your budget so you aren’t forced to use a credit card for everyday purchases.
  • Avoid cash advances unless you have no other option!  Cash advances usually come with a transaction fee (2-4% of the advance or a flat fee, depending on the card) and have a much higher interest rate than regular credit card purchases.  That means you’ll have extra charges that will take a lot longer to pay off.
  • Always try to pay more than the minimum payment due on the credit card.  Remember, every dollar that you can pay off saves you money!  Interest charges over the life of a credit card balance can be astronomical.  Have you ever paid attention to the section on your statement that shows how long it will take to pay off the balance if you only make the minimum payment?  And how much the interest will amount to?  Wow!  It normally take YEARS to pay off even a few hundred dollars.  Do yourself a favor and pay as much as you can every month and get that bill paid off!
  • And, speaking of payments, always allow plenty of time for your payment to clear… One of the biggest mistakes you can make is waiting until the last minute to pay your bill, only to discover that the site is “down for maintenance” or that it can take up to three days for your payment to post and your payment is due now.  Waiting until the last minute is a risk you can’t afford to take – just one late payment showing up on your credit report can cost you lots of points on your credit score and you may even find your interest rates rising on other credit cards and loans… all because you waited too long to make your payment!

Remember, the goal with credit is to have it available, but don’t misuse it!  Credit reporting is much more sophisticated these days… they don’t just look at whether or not you have credit and pay your bills!  There are lots of factors that are taken into consideration, including evidence of responsible usage.  Make sure you use your credit wisely!


Bad Credit? You Can Still Get That Car Loan!

Need to replace your car but worried that you won’t qualify for a loan?  Maybe your credit is less than perfect or you’re buying your first car and don’t have much of a credit history?  You can improve your chances for approval before you go car shopping just by doing a little extra planning!

First and foremost, have your down payment saved up well in advance.  The more that you can save, the better off you’ll be.  Not only will a potential lender look more favorably at a sizable down payment, but you’ll have a lower payment AND you’ll save money on interest.

Secondly, pull your credit reports and scores from all three credit bureaus ahead of time so that, regardless of which one your lender pulls, you’ll have already seen it and you’ll know what’s out there.  (If your credit score needs work and you have time to do so, work on it before you buy that car!)

And finally, shop around BEFORE you go to the dealership.  Check with your bank, savings & loan, or credit union first, then, check online for potential lenders.  There are so many really good options out there that you can’t afford not to compare offers, even if your credit is not perfect.  Don’t just automatically use the financing offered by the dealer unless it is better than what you can get on your own – remember, their lenders are working for them and not necessarily for you, so it pays to know your options before you ever set foot on that dealers’ lot.

So You Want to Buy a House

So you want to buy a house… you’ve decided that you can afford a mortgage, insurance, and the inevitable repair bills?  And it’s better to be building equity of your own than paying someone else’s mortgage, insurance, and repair bills like you do when you pay rent, right?

But, do you really know what it takes to buy your first house?  Have you really investigated anything other than looking at your “dream home” on the real estate websites?  If you’re like most first time home buyers, the answer to that question is a resounding “NO.”


The truth is, there’s a lot more to buying a house than just looking at homes, then going to the bank and getting the loan.  A. Lot. More.  In fact, getting your first house may very well be the hardest thing that you will ever do financially… you’ll find yourself digging for bits and pieces of your credit history, check stubs, tax returns, and so much more, just to get approved for the loan.  And you’ll need a lot more money than just the down payment that the bank asks for up front.  Trust me, it can be a long drawn out process, and you’re never really, really sure that it’s all going to go through until the moment when you finally sign all of the paperwork and they hand you the keys to your new home.  (And that, too, will happen eventually!)

So, what can you do up front, before you actually find the home, make the offer, and then go to the bank?  Well, first and foremost, if you’re thinking about buying a home, you need to start with your credit score. If your credit score is below 600, you’re going to have a hard time finding a mortgage lender who is willing to work with you, and if you do, you’ll likely pay a higher interest rate than if you start out with a credit score in the mid 600’s.

Don’t know your credit score?  Well, that’s the absolute first place to start anytime that you want any kind of credit, be it a mortgage loan, an auto loan, or even just a credit card.

Of course, there are lots of places where you can get your credit score for free these days, and most of them are really good, but sometimes to get your full credit report as often as you’ll want to while you’re in the process of buying a house, it’s better to pay for credit monitoring for a few months.  That way, you can keep a really good eye on your score, and if your score isn’t where it needs to be, you can check it frequently while you work on cleaning up your credit to get ready to buy the house of your dreams.


 

Five Ways to Improve Your Credit Score

Overcoming obstacles to improving your credit score is never as easy as it sounds, and honestly, there are no magic buttons that you can push that will cause your score to skyrocket over the course of a few days, weeks, or even months, but there are steps that you can take that will start you on the path to good credit sooner rather than later.


Here are our top five suggestions for getting started on the path to a better credit score:

  1. Pay your bills on time, every time. Your payment history makes up about 30% of your credit score, so even one late payment can seriously damage your credit score. And remember, it’s not just your credit cards that need to be paid on time. It’s also your mortgage, your car payment, your utility bills, your doctor bills, everything. So sit down every month, every week, or every time you get paid and pay your bills first. Then you can have that new outfit, or that extra night out, or whatever you’ve been craving… just make sure the bills are paid first.
  2. Pay attention to your credit card balances. Sure, it’s easy to tell yourself that you can put that vacation, or that new living room furniture, or even that new television on a credit card, but if that puts you over the 30% usage limit on the card (or on all your cards), then you could see your credit score suffer simply because you’re using too much of your “available credit.” So, do yourself a favor and use your credit responsibly. And in the event that you do have to use more than 30% of your available credit? Pay it down below that level as quickly as you can. Available credit is another 30% of your credit score. Use it wisely.
  3. Pay off any small balances on credit cards. For example, let’s say you have a couple of store credit cards with balances under $100.00, along with a couple of major credit cards, also with balances. Pay off the small store credit card balances first and then use those cards sparingly. Why? Because one of the items that is considered in credit score calculations is just how many of those small balances that you carry. So, the sooner you pay those off, the better it looks when your credit score is updated.
  4. Don’t try to get good debts removed from your credit report. By “good debts,” we mean those paid in full car loans, zero balance credit cards (don’t close the accounts), or even a paid in full mortgage. This illustrates that you have a good history of paying your bills on time, especially when it’s a long term commitment like a home or car loan, and looks attractive to the next lender that you may approach to buy that next car or that new home.
  5. Be careful of the number of credit inquiries you initiate. Although it’s not a huge part of your credit score, every time there is a “hard inquiry” on your credit report, it can and does affect your score for up to two years after the inquiry. So, if you’re shopping for credit cards, or a new car, or even a home, try to keep the number of credit inquiries at a minimum (and within a short time span, if possible). The easiest way to keep your credit inquiries to a minimum? Know your credit score and only apply for those credit cards and loans that fall within your credit scoring range. For example, don’t apply for a credit card that requires your credit score to be excellent if you know that your score is only fair. Instead, apply for a credit card that is specifically for fair credit – you’re more likely to be approved and you’ll only end up with the one credit inquiry.

Remember, when it comes to good credit, it’s a marathon, not a sprint, and time is the best cure that there is for a poor credit score.

 

Credit Report Changes Coming Soon!

Unpaid taxes, doctor bills, and old judgments keeping your credit score down?  Perhaps you have some erroneous data on your credit report that’s nearly impossible to get taken off?  Inasmuch as we all try to pay all of our bills on time, every time, there are times when information gets onto your credit report that may be inaccurate, outdated, or simply false. That may be about to change.

Through a settlement between the big three credit bureaus and 31 state attorneys general, the National Consumer Assistance Plan has several key pieces of the settlement that will come into play this year, including those that affect the reporting of authorized user accounts, medical debts, civil judgments, and tax liens.

How will that affect your credit report?

Most importantly, these changes should help reduce many of the credit report errors that keep individuals from qualifying for credit cards, car loans, mortgage loans, and even personal loans.  They may even help those who have been denied jobs based on the information contained in their credit reports.

Exactly what changes to credit reporting will we see?

  • First off, beginning July 1st, all civil judgement and public tax lien data that does not conform to the new reporting standards will be excluded by the three big credit bureaus.  In a nutshell, unless the data includes an individual’s name, address, and either a social security number or date of birth, it will be excluded from credit reports.  Further, this information must be physically verified every 90 days by making visits to courthouses.  Simply because of logistics and economics, the majority of civil judgments will likely be excluded after this date.  (If you have this type of information on your credit report, you may see a credit score increase of about 20 points.) Unfortunately, there is also a downside to this change.  Mortgage lenders may be forced to due more “due diligence,” and if so, prospective homeowners could face additional costs, red tape, and so forth when they are trying to get approved for financing.
  • Secondly, medical debts cannot be reported until 180 days after the date of delinquency.  This will protect you in the event that insurance payments are delayed due to verification issues, questions, etc.  And, once the bill is being paid or has been paid in full by insurance, any previously reported medical debt must be removed from credit reports.
  • And finally, authorized user data must include the full date of birth for any newly added user to all existing and new credit card accounts.

While not everyone will benefit from the credit bureaus’ commitment to cleaning up credit reporting, it will likely save most of us a lot of the stress that goes with trying to get inaccurate information off your credit report.