Securing Credit

Securing Credit

• Establishing Credit
• Comparing Offers
• If You're Denied Credit
• Resources

Establishing Credit

Each year, many people are denied credit because they have no credit history. If you've never used credit and are considering doing so:

• Consider opening a checking or savings account in your name.
• Acquire a credit card in your name.
• Establish a pre-arranged credit line with your bank.

If you are married:

• Tell creditors or stores to report shared accounts in your name as well as your spouse's name because you may have difficulty establishing credit in your name if you have kept all your credit cards in your married name (e.g. Mrs. John Smith).
• Make sure credit bureaus have a file on you, and that shared accounts listed in your spouse's file are listed in your file.
• If you are no longer married due to the death of your spouse or divorce, you will still be able to apply for credit on the basis of accounts you shared with your spouse.

Comparing Credit Card Offers

While a low interest rate is generally favorable, you must also consider other terms and conditions to determine whether an offer will save you money. It's important to know what method the credit issuer uses to calculate your finance charge, since that can make a substantial difference in your costs. Fees and benefits also vary widely among credit issuers, so it pays to shop around to find the “best” card for you.

You should also keep in mind that interest rates and monthly payments affect how long it will take to pay off your debt and how much you’ll pay over time.

Some terms you should consider:

• Annual Percentage Rate (APR): A measure of the cost of credit, expressed as a yearly rate. Some plans offer a “variable rate” tied to certain economic indicators called indexes; this means that your finance charge may increase or drop without warning. Others offer a “fixed rate,” which usually doesn’t change. A credit card company must inform you before increasing a fixed APR.

  A credit card may have several APRs; those for cash advances and balance transfers often are higher than the APR for purchases. Your payments are usually applied to the lower interest rate first.

  Many creditors offer a low promotional rate for a limited time, after which the APR could be much higher. You may be required to make purchases to maintain a promotional rate. A low rate for a balance transfer probably won’t seem as attractive under those circumstances. Because while your payments are applied to the balance transfer, you are being charged a higher rate for your purchases. Also, be aware that if you miss a payment deadline, your creditor may raise the APR.

• Grace Period: The time between the date of purchase and when the company starts charging you interest. Without a grace period, a card issuer may impose a finance charge from the date you use your card. The grace period usually applies only to new purchases. Most credit cards do not give a grace period for cash advances and balance transfers. Instead, interest charges start right away. If you carried over any part of your balance from the preceding month, you may not have a grace period for new purchases.
• Transaction Fees and Other Charges: Most creditors charge a fee if you don’t make a payment on time. You may also be charged a fee for a cash advance, balance transfer or exceeding your credit limit. Some plans charge a flat fee each month even if you don’t use the card, but you should be able to get a card without a monthly fee if you have a good credit history. Read the information in your credit card agreement to see if there are other fees and charges.
• Annual Fee: A yearly fee charged for having the card. Annual fees are often associated with cards that offer airline miles and merchandise rewards programs. Consider whether these perks are important to you. If not, look for a card with no annual fee.
• Finance Charge: The dollar amount you pay to use credit. The amount depends in part on your outstanding balance and the APR. Some credit cards have a minimum finance charge.

  The method the credit issuer uses to calculate your outstanding balance can make a big difference in your finance charge. Your outstanding balance may be calculated over 1) one billing cycle or two; 2) using the average daily balance, the adjusted balance, or the previous balance, and 3) including or excluding new purchases in the balance.

  Consider this scenario: A consumer with a $400 previous balance and $50 in new purchases makes a $300 payment. The card carries an 18 percent APR. Depending on the method used to calculate the balance and finance charge, the consumer’s finance charge may be as little as $1.50 or as much as $6.

If You're Denied Credit

If you applied for and were denied credit, the Equal Credit Opportunity Act requires creditors to provide you written notice and to specify the reasons for your denial.

For example, the creditor must tell you whether the denial was because:

• You have "no credit file" with the credit reporting agency; or
• The agency says you have "delinquent obligations."

This law requires creditors to consider, upon request, additional information you might supply about your credit history.

Resources

• FDIC: Money Smart (en español)
• Federal Trade Commission: Credit 
• Federal Reserve: “Choosing a Credit Card”
• Department of Financial Insitutions: Credit 
• Consumer Federal of America: Credit Score Quiz