Understanding and Using Credit
Credit Dos and Don’ts
Credit is a convenient financial tool. If you use credit, it is critical to understand how it works and know the reality and responsibility of repaying your debt.
DO shop around. The credit card industry is very competitive, so compare interest rates, credit limits, grace periods, annual fees, terms and conditions.
DO use the same name when you apply for credit. Don’t leave out middle initials or “Jr.”
DO read the fine print on the credit application. The application is a contract, so read it thoroughly before signing. Watch for terms such as “introductory rate” and when that rate of interest expires.
DO ask questions. If you don’t understand something, ask.
DO set a budget and stick to it. Developing a financial plan will help you keep your finances in order.
DO be wary of anyone who claims they can “fix” your credit. The only thing that can fix a credit report is time, and a positive payment history.
DO open your bill and pay it on time every month. This helps you avoid late fees and keeps your credit history – and credit score – good. It also helps protect you from identity theft and unauthorized charges.
DO pay at least the minimum due. Paying above the minimum due is a much better idea, and making a plan to reduce the level of debt is better still.
DO contact your credit card issuer if you have trouble making payments. The issuer may work with you to create a payment plan you can more easily manage.
DO be careful with your credit card. Keep it secure. Always have your card issuer’s phone number available in case your card is lost or stolen.
DO view credit as an investment in your future. By using credit wisely, you can build a good credit history. This allows you to rent an apartment, get a job, purchase a car and buy a home.
DO order a copy of your credit report annually. Your credit report is like an academic report card – it evaluates your performance as a credit customer. It needs to be accurate so you can apply for other loans.
DON’T feel pressure to get a credit card if you don’t want one. A credit card may not be right for you. Don’t be afraid to say “no” to salespeople. It’s ok to walk away.
DON’T open many credit accounts in a short period of time. It will hurt your credit score and may make credit more expensive.
DON’T pay your bills late. Late payments can hurt your credit rating and a late fee will be charged.
DON’T spend more than you can afford. A credit card is not magic money; it’s a loan with an obligation to repay. Realize the difference between needs and wants. Do you really need that CD or pizza? If you charge these items and only pay the minimum, you could be paying for those items months from now.
DON’T reach your credit limit or “max out” your cards.
DON’T apply for more credit cards if you already have balances on others.
DON’T ignore the warning signs of credit trouble. If you pay only the minimum balance, pay late or use cash-advances to pay daily living expenses, you might be in the credit danger zone.
DON’T give out your credit card number unless you’ve initiated the transaction. Be alert to identity thieves and scam artists.
A Few Things You Should Know About Credit
Borrow only what you need and what you can afford to repay.
Before you consider what kind of credit to use, you should determine whether you should use credit at all. Ask about the annual percentage rate (APR) of interest charged, if the interest rate is variable, and what fees are charged, if any.
Installment loans: These are loans that give you a lump sum of money up front, repayable in steady monthly payments with predetermined repayment terms, such as a fixed interest rate. Car loans and mortgages are installment loans, for example.
Lines of credit: These allow you to borrow money up to a certain amount any time you want and generally offer flexible repayment terms. Credit cards offer a line of credit. With both types of credit, the maximum amount you can borrow, or credit limit, depends upon your credit score, income, and other factors that determine your ability to repay.
Secured credit is backed by property you own. For example, a car loan is generally secured credit. If you fail to pay your car loan as promised, the creditor has the right to take your car. This is also the case for home equity loans and mortgages, which are tied to a house. Secured credit is usually less expensive than unsecured credit, but you should carefully consider whether you can afford to lose the property you use to secure the credit in case you experience difficulty paying back your loan.
Unsecured credit, like that offered by credit cards, will usually cost more, but will not place your personal property at risk, except under certain circumstances (e.g., if you file for bankruptcy). Borrowing money is a serious undertaking that comes with important responsibilities.
Understand your responsibilities. Just like with any contract, you need to understand the responsibilities and the consequences if you fail to meet what’s required of you. Even a few missed or late payments can affect your credit record and make it harder to get loans in the future and make them more expensive.
If you find yourself having difficulty repaying your loans, you should act right away to address it. The worst mistake people make is ignoring the problem or hoping it will go away. It won’t. Dealing with it early is the best course of action. Below are some warning signs of problems. If these sound familiar, look at the next section for ways to get your finances in order.
Identify the Warning Signs
If any of these reflect your financial situation, you may need help to manage your finances:
Making only minimum payments month after month, or skipping payments.
Making late payments.
Borrowing money to pay your bills.
Frequently using cash advances from credit cards.
Applying for new credit to pay off existing credit cards.
Having little or no cash for your needs.
Click here to download the Financial Stress Test
What To Do If You Need Help
Getting in over your head is stressful. If you run into financial trouble, the first step is to address it immediately. Ignoring the problem will only make the situation worse. Getting organized and creating a budget is an excellent start. However, if a more immediate solution is called for you should:
Contact the creditors whom you are having difficulty paying. Creditors are often the best source of short-term help and can help you avoid blemishes on your credit report.
Set a monthly limit on charging, and keep a written record so you do not exceed that amount.
Consider a lower interest debt-consolidation loan. If you qualify, combining your credit card debts into a single, lower-interest secured loan can make paying your debt down easier and free up money for living expenses. However, be careful. Consolidating your debt is only beneficial if the resulting loan terms are favorable and if you stop using additional credit.
Contact a local certified credit counseling service if you continue to experience difficulties. The staff at Consumer Credit Counseling Service (800-388-2227), for example, can help you prioritize your needs, sort through your debts, and establish a more affordable payment plan with your creditors.
Avoid scammers who promise to “fix” your credit. Getting back on your feet takes time. There is no “quick fix” and no one – payday lenders or loan sharks – can make your debts simply disappear.
Know your rights as a debtor. Bill collectors must follow certain rules, which are enforced by the Federal Trade Commission (FTC). Read about these rules on the FTC’s Web site: http://www.ftc.gov.
Do not take bankruptcy lightly. Filing for bankruptcy has long-term consequences that you should carefully consider before proceeding. Bankruptcy is not a quick or casual solution for anyone.
A budget is an organized list of your sources of income and the money you spend on essentials like housing and food, fun things like dinner and a movie, and what you need to save for the future. Just as using a map to make sure you reach your destination, budgeting is a tool that helps you realize your financial goals. It can help you navigate those moments when you experience financial difficulties. You can take charge of your finances by setting financial goals, planning a budget, and sticking to it.
Saving is important for many reasons, including for unexpected expenses such as car repairs, medical emergencies, and possible unemployment, and for planned needs such as a vacation, college tuition, or retirement. A budget can also help you reduce your debt.
Collecting as much information as you can about your spending will allow you to prepare and plan. Keep monthly records of your spending so you’ll spot places where you can save money. Know how much you can reasonably spend – and be realistic about it. Being disciplined to save a smaller amount of money on a regular basis is generally better than saving more money sporadically. Finally, rewarding yourself by spending a reasonable portion of money you have saved with the help of a budget is a good incentive to stick with your budget.
What is your current income? Be sure to include all sources of income – but only the money you’re sure you’ll receive. Don’t forget to subtract taxes and other deductions.
What are your monthly credit obligations? The amount you owe on credit cards, monthly car payment, student loans and other monthly payments should not exceed 10 to 15 percent of your take-home pay.
What are your monthly rent or mortgage expenses? If your rent is more than 30 percent of income, it may be hard to afford a down payment on a house. Keeping mortgage payments (and other expenses of owning a home) to under 30 percent is also a good idea.
What are your monthly credit and mortgage expenses? Total rent or mortgage payments plus your credit obligations should not exceed 35 to 45 percent of monthly income. Keeping these under 30 percent is a good goal, with 20 percent to housing and 10 percent to other credit obligations.
Detailed Monthly Budget Worksheet
Pay yourself first If you wait to see what’s left over, you are less likely to save. Determine in advance how much money to deposit into a savings account each month. If you receive a raise, increase the amount of money deposited into your savings account.
Take advantage of bank technology Consider automatic payroll deductions or automatic transfer from checking to savings. Arrange to have a specific amount transferred to your savings account every pay period.
Pay your bills on time – and pay more than the minimum amount Although 96 percent of Americans pay their bills on time, some find themselves paying late fees. Alleviate the hassle by scheduling time to pay bills, and put them in the mail with enough time to get to the creditor.
Determine needs versus wants Do you need to eat out every day for lunch? Do you need that gourmet cup of coffee in the morning? By bringing your lunch to work a couple days a week, you can save hundreds of dollars a year.
Consider investments For long-term goals, such as saving for a home or retirement, look into bonds, mutual funds, real estate and stocks.
Talk to us, our representatives are eager to answer your questions. Ask which package of bank products and services would best suit your needs.
Protecting Your Financial Identity
Identity theft is one of the fastest-growing types of financial fraud. It involves crooks assuming your identity by applying for credit, running up huge bills and stiffing creditors all in your name.
Take these steps to protect yourself:
1. Order copies of your credit report once a year to ensure they are accurate. You can call each of the three national credit-reporting agencies because each may contain different aspects of your credit history, or you can contact the Annual Credit Report Service for one free credit report each year.
Annual Credit Report Service: 1-877-322-8228 or www.annualcreditreport.com
Equifax: 1-800-685-1111 or www.equifax.com
Experian: 1-800-311-4769 or www.experian.com
TransUnion: 1-800-916-8800 or www.transunion.com
2. Keep an eye on your accounts throughout the year by reading your monthly/periodic statements thoroughly. Check that all of the activity in your accounts was initiated by you.
3. Tear up or shred pre-approved credit offers, receipts and other personal information that link your name to account numbers. Don’t leave your ATM or credit card receipt in public trash cans. Crooks have gone through trash to get account numbers and information to get credit in your name.
4. Know your billing cycles, and take action if you think mail is missing. Follow up with creditors if bills or new cards do not arrive on time. An identity thief may have filed a change of address request in your name with the creditor or the Post Office.
5. When you pay bills, do not put them in your mailbox with the red flag up. That’s a flashing neon light telling crooks to grab your information. Use a locked mailbox or the Post Office.
6. Protect your account information. Don’t write your personal identification number (PIN) on your ATM or debit card. Don’t write your social security number or credit card account number on a check. Cover your hand when you are entering your PIN number at an ATM.
7. Don’t carry your Social Security card, passport or birth certificate unless you need it that day. Take all but one or two credit cards out of your wallet, and keep a list at home of your account information and customer service telephone numbers. That way, if your wallet is lost or stolen, you’ll only have to notify a few of your creditors and the information will be handy.
8. Never provide personal or credit card information over the phone, unless you initiated the call. Crooks are known to call with news that you’ve won a prize and all they need is your credit card number for verification. Don’t fall for it. Remember the old saying, “if it sounds too good to be true, it probably is.”
Take Action If You Are A Victim
1. Call your local police department – Financial fraud is a crime.
2. Contact the fraud units of all three credit bureaus. Ask them to “flag” your account, which tells creditors that you are a victim of identity fraud. Also, add a victim’s statement to each of your credit bureau reports that asks creditors to contact you in person to verify all applications made in your name. Call the fraud units of the credit bureaus at:
TransUnion Fraud Assistance Department
Equifax Fraud Assistance Department
Experian Fraud Assistance Department
3. Call the Federal Trade Commission’s ID Theft hotline at 1-877-IDTHEFT. The hotline is staffed by counselors trained to help ID theft victims. Check out the FTC Web site, which includes an Identity Theft Affidavit to help simplify the process of clearing up accounts opened by an identity thief.
4. Notify your banks. They can help you obtain new account numbers for all of your checking, savings and other accounts. Be sure to pick a new PIN number for your ATM and debit cards. Close all of your credit card accounts and open with new account numbers.
5. Notify the Postal Inspector if you suspect mail theft, which is a felony.
6. Contact the Social Security Administration (SSA). Depending on your situation, you may need a new Social Security number. The SSA’s telephone number is 1-800-772-1213. You also may want to contact your telephone, long distance, water, gas and electric companies to alert them that someone may try to open an account in your name.
7. Maintain a log of all the contacts you make with authorities regarding the matter. Write down each person’s name, title, and phone number in case you need to re-contact them or refer to them in future correspondence.
Copyright 2006 American Bankers Association, 1120 Connecticut Ave NW, Washington, DC 20036. All rights reserved.