If you’re like many cash-strapped consumers who have overextended their credit cards, you’ve heard, time and again, that the way to financial solvency is to pay your cards off, one by one.
Experts also agree that you should shred your over-used cards to avoid re-using them. While this is certainly laudable advice for those with a history of overextending their credit, it is also true that securing credit cards actually helps you establish a good credit rating.
Beware The Slippery Slope!
Of course, there is no denying that personal finances which spiral out of control are a problem in the life of many American consumers. The slippery slope to high credit card debt is not always avoidable. The most principled purchaser can fall behind due to an occasional emergency.
This results in exorbitant overages, such as late fees, which make it hard to catch up. But catch up you must, to maintain a good credit score. That’s why it is recommended that credit cards only be whipped out for usage when absolutely necessary. It is also important that balances be paid before the next billing cycle.
How to Apply For a First Credit Card
Unfortunately, there are still many consumers who have never owned a credit card. As good credit is usually established through credit card usage, it is important to try to secure one.
How do you do that?
Walk into your bank branch and ask to speak with someone about opening up a bank credit card. Show the bank representative your monthly bank statements. Stress the fact that your account is never in the negative and that you always balance your checkbook. You’ll be given a one-page application to fill out. You can fill it out at home and either drop it in the mail or bring it back. A few days later, you’ll either get an approval or you will be sent a counter offer for a secured credit card.
What is a Secured Credit Card?
The main credit cards available in the United States today are Visa, MasterCard, American Express and Discover. Try to obtain a card with an APR (Annual Percentage Rate) of less than 9.9%, if possible. Some companies require that you put down a chunk of money as a deposit.
The cards that these companies offer are known as secure credit cards. This amount of money is a hedge, or protection, against your possible default, and shows the company that you’re serious about getting a credit card-and about keeping the balance low.
As A Last Resort – Should You Apply For “Bad Credit” Cards?
If you absolutely can’t obtain a credit card, so-called “bad credit” card companies may be the only alternative. (These companies specifically target consumers with what their marketing efforts term bad, damaged or non-existent credit.) An example of this sort of company is Orchard Bank. Orchard Bank claims it is the “Best Card for Bad Credit” in a recent pop up ad.
This company is regularly seen as one of the last resorts for those who are having a problem getting a credit card. Another company which targets this “damaged” credit audience is Chase Freedom Card. An on line search will quickly turn up many of these companies.
If you’re applying for one of these cards, beware the hidden costs such as the charge for calling their 900 numbers. These companies will also charge very high APR’s and annual fees. On the up side, however, they will let you charge purchases and advance you small sums of money. This will, of course, build your credit in the long run.
Who Monitors Your Credit History?
The big three credit reporting agencies, Equifax, Experian and Trans Union, track your residence history, employment history and payment history and give you a rating, or a FICO score. These scores range from 350 to 900. In the mortgage realm-and most likely in matters involving other large purchases-anything over 650 is considered a very good credit score.
All three agencies vary in their scoring. So if you’re being considered for a mortgage, the “average” or second figure of the three will generally be considered the accurate reading. (For instance, let’s say your scores are 620, 650 and 670. Your actual credit rating is considered to be the middle, or 650, score.)
How is your credit ranked?
Usually, an individual’s revolving credit history is assessed.
Revolving credit – What Is It?
When you’ve got a balance that goes up or down depending on how funds are withdrawn and repaid, that’s revolving credit. In contrast to installment types, revolving credit does not have a fixed number of payments. Also, the credit may be used repeatedly. Credit cards are an example of revolving credit.
Other examples are lines of credit (at a bank) and home equity loans. Among the thirty or so factors considered by credit rating companies, one important area which these three entities keep on eye on is the ratio of total balances to total revolving credit limits.
Taking Advantage of a Grace Period
Now you know how important it is to obtain-and pay off-credit cards. There are a few other basic rules you need to know about. Once you’ve obtained one or two low-rate credit cards, you should pay the balance off each month before you’re charged any fee to use the money.
This is known as the grace period, a time during which you can pay off the bill in full without being charged finance charges. This will help you to establish an impressive credit history. You will also have the ability to pay for purchases that you don’t have cash for at the time. Many successful credit card owners think of it as “giving themselves a cash advance”.
Should You Transfer Balances?
As you don’t want your credit card companies looking askance at your history, you don’t want to open many accounts merely to transfer funds. However, if you do this once, and you are able to transfer balances to a company that is truly low, such as 2%, that won’t be a mark against you.
Don’t Carry A High Balance!
Credit companies frown upon any unpaid balances. If you carry an unpaid balance for six months or so, no matter how tiny the amount, you will be identified as a credit risk for seven whole years. (After that time, your credit “slate” will be wiped clean.) Also, for some reason, it is considered better to carry a small balance, than it is to have a zero balance.
Don’t “Max Out” Your Cards
Credit card companies rate your credit based on how high your balance is, relative to your limit. If you “max out” your cards over a long period of time, your rating will go down.
Don’t Carry Too Many Cards
Finally, try to limit the cards you carry to two or three in number. Applying for too many cards within a short period of time will label you a high risk.