Not all credit cards are created equally.When choosing a card, pay close attention to the beginning interest rate and the terms and conditions under which the rate can rise. In addition, look carefully at the features offered - especially if you are paying a fee to use them. Consider the following traps when managing your credit card activity. Be cautious about using a card based on its perks or special bonuses. You might be tempted to charge more just to get a bonus, like frequent flyer miles. Unless you pay off your balances every month, most bonuses do not pay off. Interest costs and fees can be more than the value of the bonus, or the bonus could go unused.
Be sure to read the fine print and understand the terms of each card. Unless you looked for it, you would likely miss the fact that many credit card companies have the built-in "universal default" clause we talked about earlier, allowing them to raise your interest rate if you're late making a payment - even to another creditor.
Avoid paying too high a rate for your credit card purchases. Always check the fees and interest rate on cash advances before you actually borrow cash from your credit card. Check with your bank to see whether you might obtain a consumer loan instead. Do this also when you are thinking about a large purchase. If you can borrow the same amount from a bank or credit union at a lower rate of interest, you can avoid this all-too-common high-interest trap.
Do not pay for extras like credit card insurance or gold or platinum status. There are almost always lower-price or free alternatives to these services. Even if you are worried about protection from credit card fraud, do not purchase insurance. This might be tempting to you if you have a high P (Personal) score and are particularly vigilant about personal security. Instead, photocopy all of your credit cards and indicate next to each card on the photocopy the number to call if your card is lost or stolen. Keep one copy in your safe deposit box and another one at home.
Poor credit results from making late payments, borrowing too much money in relation to your income, or charging to the limit ("maxing out") your credit cards.When you have marginal or poor credit, you can experience difficulty getting a car loan, a place to live, or your ideal job. You can be turned down for an insurance policy, and a bank can decide you are not a worthy customer, even if you want to open a bank account and deposit money with that bank. Although you eventually may be approved with marginal credit, you will pay higher rates and fees than someone with good credit. And poor credit can take years to fix. Life is full of maybes and possibilities.
You may meet the man or woman of your dreams and decide to settle down, or you may be offered the ideal job across town, but you need to buy a better car if you are going to accept it. Your credit rating can make a difference in whether or not you pursue these possibilities. Then there are life's little surprises. Your plan to start a family eventually may suddenly accelerate by an unplanned, but happy, pregnancy. Or your father may have a stroke and suddenly be unable to care for himself, forcing you to shoulder some of the burden. Your credit rating can help you roll with life's punches, or life's punches can roll over you. Being prepared to manage and cope with sudden loss is an important part of having the "right stuff."
As almost everyone knows, our credit-worthiness is based on credit scores that are tallied from information accumulated from credit reporting agencies and other sources. Lenders use credit scores to help them decide whether to give loans or credit cards to applicants, and if they do, what their credit risk is likely to be. The most widely used credit scores are FICO scores, calculated by Fair Isaac, the company that created the widespread use of credit scoring. Although some banks and financial institutions use their own credit scoring, FICO scores are widely used and are based solely on information in consumer credit reports maintained at the three major U.S. credit reporting agencies: TransUnion, Equifax, and Experian.
In addition to FICO scoring, many financial institutions and banks calculate and maintain their own credit scoring system, and a few newcomers are vying to compete with FICO in the future. All scores, by whatever company calculates them, use complex formulas that compare certain factors in your credit reports - your pattern of repayment, how close you are to your credit limit, the length of your credit history (not your age), your credit mix, and the number of inquiries made by companies to whom you have applied for credit - with the rest of the population.
What this number does is to allow creditors to see at a glance whether you are a good credit risk or not. The ease of using this number, as opposed to reviewing your entire credit report, makes it easier for creditors to make quick decisions (such as those "instant credit" offers at the cash register). It also creates uniformity throughout the financial marketplace. Most creditors create ranges of what they find acceptable or of what interest rates they will offer, and they simply compare your number to their ranges.
Your credit report is available free of charge and your score is available for a nominal fee. To protect yourself from identity theft or mistaken identity and other reporting errors, you should make it a point to review your credit report from each credit reporting agency at least once a year. This is essential if you are thinking about making a large purchase such as a home or car. You can request your credit report by phone, mail, or request it online.
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