credit cards ebook

Credit [email protected]

www.LifeFocus.com

LifeFocus.comT. Young

March 28, 2010

Table of ContentsCredit Cards ......................................................................................................................................................4

The miracle of plastic ............................................................................................................................... 4

Applying for a credit card ......................................................................................................................... 4

Using a credit card properly ..................................................................................................................... 4

When it's payback time ............................................................................................................................ 5

You've got a right ..................................................................................................................................... 5

Advantages and Disadvantages of Credit Cards .............................................................................................. 6

Credit and Charge Cards .................................................................................................................................. 7

Deciding Which Credit Card to Get ...................................................................................................................8

Choosing a Credit Card .....................................................................................................................................9

Learn the lingo ......................................................................................................................................... 9

Once you can talk the talk, ask questions ................................................................................................9

A word about balance transfers ............................................................................................................... 9

Voice your concern if you're turned down ................................................................................................ 10

Speak up for your rights ...........................................................................................................................10

Credit Traps for the Unwary ..............................................................................................................................11

Revolving credit can make it hard for you to pay off debt ........................................................................ 11

Interest and fees can add to the cost .......................................................................................................11

If you surf your debt, beware the wake .................................................................................................... 12

Protect yourself against credit fraud and identity theft ............................................................................. 12

Understanding Your Credit Report ....................................................................................................................13

You can see what they see: getting a copy of your credit report ............................................................. 13

What's it all about? ...................................................................................................................................13

Basing the future on the past ................................................................................................................... 14

Correcting errors on your credit report .....................................................................................................14

Debt Consolidation ............................................................................................................................................15

What is debt consolidation? ..................................................................................................................... 15

LifeFocus.com Page 2 of 27

March 28, 2010See disclaimer on final page

How do you consolidate your debts? ....................................................................................................... 15

Advantages of debt consolidation ............................................................................................................ 15

Disadvantages of debt consolidation ....................................................................................................... 15

Should you consolidate your debts? ........................................................................................................ 16

How do I get a copy of my credit report? .......................................................................................................... 17

How can I repair my poor credit? ...................................................................................................................... 18

I can't pay my bills. Should I declare bankruptcy? ............................................................................................ 19

How can I correct errors on my credit report? ...................................................................................................20

Will debt consolidation hurt or help my credit rating? ........................................................................................21

How can I lower the interest rate on my credit card? ........................................................................................22

How can I get credit if I have no credit history? ................................................................................................ 23

How can I pay off my credit card debt? .............................................................................................................24

I've finally paid off my credit cards. Should I close them or leave them open with zero balances? .................. 25

I get a lot of credit card offers. How can I tell which one is best? ..................................................................... 26



Credit Cards

The miracle of plastic

It's so convenient. Pull out a plastic card and you can purchase a designer suit at that new boutique, dinner at your favorite restaurant, groceries at the supermarket--or all three. Need cash? Use the card at a nearby automated teller machine (ATM) and walk off with a fistful of dollars. Want to get away from it all? Book the flight, provide your account number, and you're on your way.

Buy now, pay later

That innocuous piece of plastic unlocks access to a revolving line of credit, one that allows you to make purchases (or get cash advances) now and pay for them later. When you apply for the account, the card issuer determines a credit limit, which is the maximum balance you may carry. As you make purchases (or incur finance charges and/or other creditor fees), your remaining available credit decreases. If you attempt to make a purchase (or take a cash advance) that will cause your account to exceed your credit limit, your transaction will be denied unless you agree to allow it (and accept the over-the-limit fee that comes with it). As you make payments against your outstanding principal balance, your available credit increases.

And pay and pay

You'll be expected to pay for the purchases (or cash advances) that you make, as well as for the use of the lender's money. The normal finance charges on credit cards can be high, even in times of low interest rates. In addition, if you're late making payments, the lender may start charging you an interest rate higher than the standard rate (to offset the repayment risk you pose) and/or other fees that can make using your card even more expensive. If you make only minimum monthly payments on your account, you may find the card's convenience coming at a high price.

Applying for a credit card

Credit cards are available from banks, credit unions, retail stores, and even oil companies. If you have reasonably good credit, all you'll need to do to apply for a credit card is sort through the offers stuffing your mailbox. You may even be "pre-approved" for a card. This means only that the creditor making the offer has decided, based on its general criteria for eligibility, that you're a good candidate for credit. Actual acceptance will come only when you've completed the credit application and the creditor is satisfied with a review of your personal information and credit history. In most cases, you can complete an application for a credit card by providing information about yourself on paper, over the telephone, or via the Internet. Once the creditor has your information, you'll probably receive a reply within hours; if you're approved, you'll have your card within a few days.

Even if you have a blemished credit history, it's likely you'll still receive a credit card. However, the greater the risk the creditor perceives you to be, the higher the interest rate you'll be charged when you "charge it." Before you accept a credit card, be sure you understand the specific terms and conditions of its use. The basics of these terms and conditions are usually spelled out in the application material, and detailed information is included in the cardholder agreement you receive with the card itself.

Using a credit card properly

Used properly, credit cards can offer you financial leverage you might not otherwise enjoy. If you pay off your balance in full each month, your credit card account acts as a short-term, interest-free loan. This can help alleviate cash flow problems. You can also use a credit card to make large purchases sooner than you could have otherwise, and to buy items when they're on sale.

The convenience offered by credit cards can often lead to overspending, however. Monitor your card usage and balances. Understanding how to read your monthly credit card statements can help you do both. Make sure your



monthly payments fit comfortably within your budget. Learn the signs of credit abuse, and how to avoid becoming an abuser. You'll also want to take certain steps to reduce the likelihood of becoming a victim of credit fraud.

When it's payback time

The outstanding balance due on your credit card account is the total amount you owe the creditor at any given moment. It includes any unpaid balance carried over from your previous month's statement, plus any new purchases, accrued interest, and other charges (such as late and over-the-limit fees), less any payments you've made or reversed charges (e.g., returned merchandise refunds) that have not yet been posted to your account.

There are several approaches you might take to paying off your outstanding credit card balance. These include:

• Paying the balance in full each month

• Making the minimum monthly payment

• Transferring the balance to a credit card with a lower interest rate

• Refinancing the debt as an unsecured personal loan

• (If you are a homeowner) refinancing the debt with an equity line of credit

Each strategy has its costs and benefits, and you should weigh them carefully before you decide what approach you may want to take in managing your debt. If you become overwhelmed with credit card debt, there are companies that will help you calculate a repayment strategy to rid yourself of your burden.

You've got a right

Your consumer rights related to credit cards are protected by various federal laws. The Fair Credit Reporting Act (FCRA) helps make sure that the credit-reporting agencies, or credit bureaus, furnish correct information about you to those evaluating your application for credit. The Equal Credit Opportunity Act (ECOA) ensures that, when you apply for a credit card, you won't be discriminated against because of your gender, race, marital status or age. The Credit Card Accountability Responsibility and Disclosure Act (the Credit CARD Act) limits when credit card issuers may increase interest rates and bans certain billing and payment practices. The Fair Credit Billing Act (FCBA) limits your liability for unauthorized purchases, offers protection against billing errors, and may help you reverse the purchase of inferior goods or services charged to your credit card. If you run into difficulty repaying your debts, the Fair Debt Collection Practices Act (FDCPA) spells out what practices collection agents may and may not use to collect them. But you must also know your responsibilities and what steps you must take to exercise these rights.



Advantages and Disadvantages of Credit Cards

Advantages Disadvantages

Convenience--Credit cards can save you time and trouble--no searching for an ATM or keeping cash on-hand.

Overuse--Revolving credit makes it easy to spend beyond your means.

Record keeping--Credit card statements can help you track your expenses. Some cards even provide year-end summaries that really help out at tax time.

Paperwork--You'll need to save your receipts and check them against your statement each month. This is a good way to ensure that you haven't been overcharged.

Low-cost loans--You can use revolving credit to save today (e.g., at a one-day sale), when available cash is a week away.

High-cost fees--Your purchase will suddenly become much more expensive if you carry a balance or miss a payment.

Instant cash--Cash advances are quick and convenient, putting cash in your hand when you need it.

Unexpected fees--Typically, you'll pay between 2 and 4 percent just to get the cash advance; also cash advances usually carry high interest rates.

Perks--From frequent flier miles to discounts on automobiles, there is a program out there for everyone. Many credit card companies offer incentive programs based on the amount of purchases you make.

No free lunch--The high interest rates and annual fees associated with credit cards often outweigh the benefits received. Savings offered by credit cards can often be obtained elsewhere.

Build positive credit--Controlled use of a credit card can help you establish credit for the first time or rebuild credit if you've had problems in the past--as long as you stay within your means and pay your bills on time.

Deepening your debt--Consumers are using credit more than ever before. If you charge freely, you may quickly find yourself in over your head--as your balance increases, so do your monthly minimum payments.

Purchase protection--Most credit card companies will handle disputes for you. If a merchant won't take back a defective product, check with your credit card company.

Homework--It's up to you to make sure you receive proper credit for incorrect or fraudulent charges.

Balance surfing--Many credit card companies offer low introductory interest rates. These offers allow you to move balances to lower-rate cards.

Teaser rates--Low introductory rates may be an attractive option, but they last only for a limited time. When the teaser rate expires, the interest rate charged on your balance can jump dramatically.



Credit and Charge Cards

Credit cards generally allow consumers to run a balance from month to month. Charge cards generally require full payment of the balance each billing period. Here are the most common types of each.

Credit Cards Charge Cards

Bank Cards• All-purpose cards are accepted by a wide

variety of merchants• Issuers are generally licensed with franchised

credit payment organizations such as MasterCard or Visa

• Credit limits and terms, interest rates, and fees vary from issuer to issuer

Reward Cards• Card use creates a reward (e.g., airline miles,

discounts at select merchants, or cash rebates)• Affinity cards donate a portion of the reward to

a partnering organization (e.g., a charity, college, or professional group)

• Rewards may be limited (e.g., cap on amount, discount expiration dates)

• Often have relatively high annual fees and interest rates

Secured Cards• Require a deposit on account with the issuer as

collateral• Generally offer credit limits of 50% to 150% of

the amount on deposit• Often have high interest rates and fees, low

credit limits• Can sometimes be converted to unsecured

cards after a period of satisfactory payments• Can be used to (re)establish a positive credit

history

Travel and Entertainment Cards

• Examples of issuers are American Express and Diners Club International

• No preset spending limits• Usually require payment of entire balance each

month, no interest charges • Traditionally have offered attractive benefits for

travel and entertainment • Often have relatively high annual fees• May not be as widely accepted as bank cards

Merchant Cards• May be used only with the issuer (e.g.,

department store, oil company)• Relatively easy to obtain• Often carry low credit limits, high interest rates• Issuer often retains right to repossess

purchased merchandise if you default• May offer discounts on purchases



Deciding Which Credit Card to Get

Which credit card is right for you primarily depends on how you plan to use it. Most people use credit cards as a convenient alternative to cash or checks, to make big purchases, or to travel. Depending on how you'll use your credit card, consider these points when shopping for the best value.

If you're a If you're a If you're a

convenience shopper big spender frequent traveler

You'll use your card instead of cash or checks for all your routine purchases (e.g., at the grocery store, the gas station, the pharmacy, the video store). You'll generally pay off the entire balance each month.

You'll use your card either to make many purchases all at once (e.g., holiday shopping) or to make a large purchase sooner than you otherwise could (e.g., a new refrigerator when it's on sale). You'll generally stretch out your payments.

You'll use your card for frequent business or pleasure trips. You want a card that's accepted all over the world, and you'd prefer an issuer who offers travel-related services

What to look for What to look for What to look for

• A bank card with no annual fee• No (or low) transaction fees• A long grace period (so your

purchases don't start to accrue interest immediately)

• A low interest rate (just in case you can't pay off the entire balance)

• As an alternative, consider a debit card affiliated with a payment card plan (e.g., Visa or MasterCard)

• A bank card with a high credit limit

• A low interest rate• An outstanding balance

calculation method that minimizes finance charges (e.g., an adjusted balance, previous balance, or average daily balance excluding new purchases method)

• No (or a low) annual fee• No transaction fees• Merchandise or cash-back

rewards

• A travel card with no (or a high) credit limit

• No (or low) transaction fees, especially on cash advances, currency exchanges, and foreign currency purchases

• Free services (e.g., hotel or flight reservations, car rental or travel insurance)

• Travel-related perks (e.g., frequent-flyer miles, discounts on meals or accommodations)



Choosing a Credit Card

Like dandelions in a spring lawn, credit card offers pop up everywhere--stuffing your mailbox, flashing on the Internet, even falling from the magazines in your doctor's waiting room. And they all sound so attractive. "0% APR until next year!" "No fee if you transfer a balance now!" "Low fixed rate!" You're thinking of applying for a card, but how do you decide which offer is best for you?

Learn the lingo

In order to evaluate credit card offers, you'll need to learn the language they use. Here are some of the more important terms.

• Annual percentage rate (APR): the cost of credit as indicated by a yearly (fixed or variable) interest rate. This rate and the periodic rate (the APR expressed as a daily or monthly factor) must be disclosed to you before you become obligated on the card.

• Balance computation method: the formula used to determine the outstanding balance on which you're charged interest for the billing period.

• Finance charge: the cost of credit for the billing cycle, expressed as a dollar amount and determined by multiplying the outstanding balance by the periodic rate.

• Fees: charges (other than the finance charge) that may be levied against your account. Common examples include an annual fee, cash advance fees, balance transfer fees, late payment fees, and over-the-limit fees.

• Grace period: the length of time prior to your payment due date during which you may pay off your account without incurring any finance charge.

Once you can talk the talk, ask questions

Any credit card will cost you something, but depending on the terms and conditions, some are more costly than others. When evaluating a credit card offer, here are some points to consider:

• What's the interest rate? Is it fixed or variable? If variable, how is it calculated?

• Will you be charged different interest rates for purchases, balance transfers, and cash advances?

• What method determines the outstanding balance used to calculate the finance charge?

• Is there an annual fee, and what other fees may be charged?

• What's the length of the grace period (if any)?

What you should look for depends in part on how you'll use the card. If you intend to pay off the balance each month and won't incur any finance charges, obtaining a low interest rate is less important than finding a card with no annual fee, minimal transaction fees, and a long grace period. If you'll carry a balance from month to month, you'll want a low interest rate and a balance calculation method that minimizes your finance charges.

A word about balance transfers

Perhaps you're not currently using your credit card, but you want to minimize the finance charge on your existing balance. One way to do so is to transfer your balance periodically to a new card with a low introductory "teaser" rate of interest. If you choose to "surf" in this fashion, be cautious. Watch out for:



• A low interest rate on new purchases, but a higher interest rate on balance transfers

• A low introductory interest rate that applies only for a very short period of time

• Balance transfer fees, particularly uncapped amounts calculated as a percentage of the balance transferred

• Termination fees and retroactive interest charges levied if you decide to surf the next wave and close the account or transfer the balance to another card before a specified time period has elapsed

When you transfer a balance from an existing card to a new one, it's a good idea to close the account you're leaving. By doing so, you won't be tempted to use the card again (at a higher rate of interest once the introductory offer period has expired), and you'll minimize the potential for fraudulent use or identity theft. What's more, if you don't close such accounts and later try to transfer your balance again, a new card issuer might turn down your application, afraid you'll incur too much debt by running up new balances on dormant, but open, credit card accounts.

Voice your concern if you're turned down

If you're turned down for a credit card, the issuer must inform you specifically why you were turned down or tell you how to get this information. When the rejection is based even in part on information contained in your credit report, you're entitled to a free copy of the report from the credit bureau that issued it. Get the report and review it; if you discover incorrect notations on it, dispute them. Then contact the card issuer to plead your case, informing the issuer of any corrections made to your credit report. With persistence, you may be able to convince the issuer to approve your credit application.

Speak up for your rights

Your consumer rights related to credit cards are protected by various federal laws.

• The Fair Credit Reporting Act (FCRA) protects your right to know what's in your credit file and sets up procedures to ensure that credit reporting agencies or credit bureaus furnish correct information about you

• The Fair and Accurate Credit Transactions Act of 2003 (FACTA) amends and strengthens the FCRA, provides protections against identity theft, improves resolution of consumer disputes, improves the accuracy of consumer records, and makes improvements in the use of and consumer access to creditor information

• The Equal Credit Opportunity Act (ECOA) ensures that when you apply for credit, you won't be discriminated against because of your gender, race, marital status, or age

• The Fair Credit Billing Act (FCBA) offers protection against billing errors (including limiting your liability for unauthorized purchases) and may help you reverse the purchase of inferior goods or services charged to your credit card

• The Fair Debt Collection Practices Act (FDCPA) spells out what practices collection agents may and may not use to collect a debt

If you feel your rights have been violated and you can't resolve the issue with the creditor, you may file a complaint with one of the federal agencies responsible for enforcing consumer credit laws, including the Federal Trade Commission (FTC), or you can contact your state's attorney general.



Credit Traps for the Unwary

It's hard to imagine functioning in today's society without access to credit. However, you need to be careful not to fall victim to some of the pitfalls associated with it.

Revolving credit can make it hard for you to pay off debt

Credit cards allow you to spend money you don't currently have, and to repay what you've spent over time instead of all at once. When you use a card, the balance you owe increases, and your remaining available credit decreases. As you make your payments to reduce your outstanding balance, your available credit once again increases. Thus, your credit revolves around for you to use again.

Since you can spend more than you currently have, you can easily spend more than you can afford. As your balance increases, your minimum monthly payments also increase, and soon you'll find yourself in over your head--especially if interest rates and a variety of fees are high.

Interest and fees can add to the cost

Credit card debt generally carries a high interest rate. Your minimum monthly payment--a percentage (often as low as 2 to 4 percent) of the total balance due--may cover little more than the monthly interest charge. Consequently, your minimum payment may only minimally decrease what you already owe. If possible, increase your monthly payment above the minimum required. The higher you can make the payment, the faster you will pay off the debt.

When opening a new account, always check to see how the finance charge is calculated. Here are some of the methods used:

• Adjusted balance method: Balance due at the beginning of the billing cycle less any payments made during the cycle; excludes new purchases made during the cycle

• Previous balance method: Balance due at the beginning of the billing cycle

• Average daily balance method: Total of the balances due each day in the billing cycle divided by the number of days in the cycle; payments made are subtracted as posted to determine daily balances; new purchases may or may not be added in

The amount of your finance charge can vary widely from method to method.

In an effort to attract your business, many lenders offer very low introductory rates--3.9 percent annually or less. However, these rates generally last no more than three to six months and increase to the current market rate thereafter. Moreover, the introductory rates may apply only to balances you transfer from other cards. They may not apply to new purchases and rarely if ever to cash advances. Finally, if your monthly payment is late, the interest rate may be raised to the current market rate--and sometimes beyond.

A credit card issuer may increase the interest rate you're charged under specific circumstances. These circumstances are (1) the index on which the rate is based changes, (2) it is a promotional rate that has expired, (3) you have failed to comply with a hardship workout plan, or (4) your account falls 60 days past due. If your rate is increased because the account falls 60 days past due, you must be informed that the rate increase will be terminated (and the rate restored to what it was before the increase) once you have made timely minimum payments for six months. However, in this case, it's doubtful the rate would be restored to the original low introductory rate.

If you have two different interest rates on one account (e.g., a lower rate for purchases, a higher one for cash advances), the creditor will post the minimum payment toward the lower interest rate balance, not the higher.



However, a credit card company must apply any payment overthe minimum payment due toward the portion of an existing balance with the highest interest rate.

You may also incur a wide variety of fees. Creditors may charge you an annual fee to maintain the account. These fees can range from $25 to $50 or more each year. They may also charge fees to transfer balances from other cards. Generally, these processing fees equal 2 to 4 percent of the amount you transfer. Many banks levy a similar surcharge on transactions involving conversions from foreign currencies. If you're late with your monthly payment, you may be charged a late payment fee that can be as much as $39 each month you're overdue. If you authorize the creditor to complete a transaction that sends your balance over your approved credit limit, you will be assessed an overlimit fee.

When these fees add up, you may find that making your minimum monthly payment won't bring your balances down. In fact, your balance will increase if your monthly payment isn't greater than the accumulated interest and fees due, since these unpaid charges become a part of the principal you owe. Moreover, your account may then be considered past due and reported as such to the credit bureaus.

If you surf your debt, beware the wake

You may periodically transfer your balance from one introductory offer to the next. This is known as surfing. Done successfully, surfing lets you avoid the higher interest charges that your debt would incur when the original card offer expires. By the time the interest rate on the original card increases, you've surfed over to a new offer at another low rate.

Although surfing helps keep your interest charges to a minimum, it's not without pitfalls. You may be offered a low rate only on balance transfers; if new purchases and cash advances are billed at a higher interest rate, these charges could offset the savings you would otherwise enjoy. Moreover, as creditors move to counteract the surfing trend, many stipulate that if you transfer balances to another card within a certain time after opening your account, you'll be retroactively charged a higher rate of interest on the amount you transfer. Thus, surfing before this time period is up eliminates the savings.

Finally, if you transfer balances to a new card, close the original account as soon as you've paid it off. Write the creditor a letter (keep a copy for your records) asking it to inform the credit bureaus that the account was closed at your request. This prevents new potential creditors from denying you credit when they see too many open lines of credit, and it also deters anyone else from fraudulently using an inactive account.

Protect yourself against credit fraud and identity theft

Credit fraud (the illegal use of your accounts) and identity theft (opening new credit using information about you) are two of the fastest-growing crimes today. In many cases, you may not know you've been victimized until it's too late. Here are some indicators of these crimes:

• A creditor informs you that it received an application in your name

• You've been approved for or denied credit you didn't apply for

• You no longer get your credit card statements in the mail

• Your credit card statements include purchases or cash advances you never made

To minimize the chances of being victimized, take precautions to safeguard your credit account information. Don't carry credit cards you don't use often. Be sure to sign your cards, and never sign a blank charge slip. When you use the card, try to keep it within your sight. Save your receipts, and obtain and destroy any carbons. Don't allow a sales clerk to write your credit card number on a check "for identification." Finally, never give out your account number over the telephone unless you initiated the call and know the organization to be reputable.



Understanding Your Credit Report

Your credit report contains information about your past and present credit transactions. It's used primarily by potential lenders to evaluate your creditworthiness. So if you're about to apply for credit, especially for something significant like a mortgage, you'll want to get and review a copy of your credit report.

You can see what they see: getting a copy of your credit report

Every consumer is entitled to a free credit report every 12 months from each of the three credit bureaus. To get your free annual report, you can contact each of the three credit bureaus individually, or you can contact one centralized source that has been created for this purpose. Besides the annual report, you are also entitled to a free report under the following circumstances:

• A company has taken adverse action against you, such as denying you credit, insurance, or employment (you must request a copy within 60 days of the adverse action)

• You're unemployed and plan to look for a job within the next 60 days

• You're on welfare

• Your report is inaccurate because of fraud, including identity theft

You can order your free annual report online at www.annualcreditreport.com, by calling 877-322-8228, or by completing an Annual Report Request Form and mailing it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

Alternatively, you can contact each of the three credit bureaus:

• Experian National Consumer Assistance Center, www.experian.com, P.O. Box 2104, Allen, TX 75013-2104, (888) 397-3742

• Trans Union LLC, Consumer Disclosure Center, www.transunion.com, 1000, Chester, PA 19022, (800) 916-8800

• Equifax, Inc., www.equifax.com, P.O. Box 740241, Atlanta, GA 30374, (800) 685-1111

If you make your request online, you should get access to your report immediately. If you request your report by phone or mail, you should receive it within 15 days.

What's it all about?

Your credit report usually starts off with your personal information: your name, address, Social Security number, telephone number, employer, past address and past employer, and (if applicable) your spouse's name. Check this information for accuracy; if any of it is wrong, correct it with the credit bureau that issued the report.

The bulk of the information in your credit report is account information. For each creditor, you'll find the lender's name, account number, and type of account; the opening date, high balance, present balance, loan terms, and your payment history; and the current status of the account. You'll also see status indicators that provide information about your payment performance over the past 12 to 24 months. They'll show whether the account is or has been past due, and if past due, they'll show how far (e.g., 30 days, 60 days). They'll also indicate charge-offs or repossessions. Because credit bureaus collect information from courthouse and registry records, you may find notations of bankruptcies, tax liens, judgments, or even criminal proceedings in your file.

At the end of your credit report, you'll find notations on who has requested your information in the past 24



months. When you apply for credit, the lender requests your credit report--that will show up as an inquiry. Other inquiries indicate that your name has been included in a creditor's prescreen program. If so, you'll probably get a credit card offer in the mail.

You may be surprised at how many accounts show up on your report. If you find inactive accounts (e.g., a retailer you no longer do business with), you should contact the credit card company, close the account, and ask for a letter confirming that the account was closed at the customer's request.

Basing the future on the past

What all this information means in terms of your creditworthiness depends on the lender's criteria. Generally speaking, a lender feels safer assuming that you can be trusted to make timely monthly payments against your debts in the future if you have always done so in the past. A history of late payments or bad debts will hurt you. Based on your track record, a new lender is likely to turn you down for credit or extend it to you at a higher interest rate if your credit report indicates that you are a poor risk.

Too many inquiries on your credit report in a short time can also make lenders suspicious. Loan officers may assume that you're being turned down repeatedly for credit or that you're up to something--going on a shopping spree, financing a bad habit, or borrowing to pay off other debts. Either way, the lenders may not want to take a chance on you.

Your credit report may also indicate that you have good credit, but not enough of it. For instance, if you're applying for a car loan, the lender may be reviewing your credit report to determine if you're capable of handling monthly payments over a period of years. The lender sees that you've always paid your charge cards on time, but your total balances due and monthly payments have been small. Because the lender can't predict from this information whether you'll be able to handle a regular car payment, your loan is approved only on the condition that you supply an acceptable cosigner.

Correcting errors on your credit report

Under federal and some state laws, you have a right to dispute incorrect or misleading information on your credit report. Typically, you'll receive with your report either a form to complete or a telephone number to call about the information that you wish to dispute. Once the credit bureau receives your request, it generally has 30 days to complete a reinvestigation by checking any item you dispute with the party that submitted it. One of four things should then happen:

• The credit bureau reinvestigates, the party submitting the information agrees it's incorrect, and the information is corrected

• The credit bureau reinvestigates, the party submitting the information maintains it's correct, and your credit report goes unchanged

• The credit bureau doesn't reinvestigate, and so the disputed information must be removed from your report

• The credit bureau reinvestigates, but the party submitting the information doesn't respond, and so the disputed information must be removed from your report

You should be provided with a report on the reinvestigation within five days of its conclusion. If the reinvestigation resulted in a change to your credit report, you should also get an updated copy.

You have the right to add to your credit report a statement of 100 words or less that explains your side of the story with respect to any disputed but unchanged information. A summary of your statement will go out with every copy of your credit report in the future, and you can have the statement sent to anyone who has gotten your credit report in the past six months. Unfortunately, though, this may not help you much--creditors often ignore or dismiss these statements.



Debt Consolidation

If you have a lot of debt, you're not alone. Today, more and more Americans are burdened with credit card and loan payments. So whether you are trying to improve your money management, having difficulty making ends meet, want to lower your monthly loan payments, or just can't seem to keep up with all of your credit card bills, you may be looking for a way to make debt repayment easier. Debt consolidation may be the answer.

What is debt consolidation?

Debt consolidation is when you roll all of your smaller individual loans into one large loan, usually with a longer term and a lower interest rate. This allows you to write one check for a loan payment instead of many, while lowering your total monthly payments.

How do you consolidate your debts?

There are many ways to consolidate your debts. One way is to transfer them to a credit card with a lower interest rate. Most credit card companies allow you to transfer balances by providing them with information, such as the issuing bank, account number, and approximate balance. Or, your credit card company may send you convenience checks that you can use to pay off your old balances. Keep in mind, however, that there is usually a fee for this type of transaction, and the lower rate may last only for a certain period of time (e.g., six months).

Another option is to obtain a home equity loan. Most banks and mortgage companies offer home equity loans. You'll need to fill out an application and demonstrate to the lender that you'll be able to make regular monthly payments. Your home will then be appraised to determine the amount of your equity. Typically, you can borrow an amount equal to 80 percent of the value of the equity in your home. Interest rates and terms for home equity loans vary, so you should shop around and compare lenders.

Some lenders offer loans specifically designed for debt consolidation. Again, you'll need to fill out an application and demonstrate to the lender that you'll be able to make regular monthly payments. Keep in mind, however, that these loans usually come with higher interest rates than home equity loans and, depending on the amount you borrow, may require collateral on the loan (e.g., your car or bank account).

Advantages of debt consolidation

• The monthly payment on a consolidation loan is usually substantially lower than the combined payments of smaller loans

• Consolidation loans usually offer lower interest rates

• Consolidation makes bill paying easier since you have only one monthly payment, instead of many

Disadvantages of debt consolidation

• If you use a home equity loan to consolidate your debts, the loan is secured by a lien on your home. As a result, the lender can foreclose on your home if you default on the loan.

• If the term of your consolidation loan is longer than the terms of your smaller existing loans, you may end up paying more total interest even if the rate is lower. So you won't actually be saving any money over time, even though your monthly payments will be less.

• If you use a longer-term loan to consolidate your debts, it will take you longer to pay off your debt.



Should you consolidate your debts?

For debt consolidation to be worthwhile, the monthly payment on your consolidation loan should be less than the sum of the monthly payments on your individual loans. If this isn't the case, consolidation may not be your best option. Moreover, the interest rate on your consolidation loan should be lower than the average of the interest rates on your individual loans. This allows you not only to save money but also to lower your monthly payment.



How do I get a copy of my credit report?

Question:

How do I get a copy of my credit report?

Answer:

The three major credit reporting agencies are Experian, Trans Union, and Equifax. You are entitled to a free credit report from each of the three agencies every 12 months. You can get your free copies by contacting one central source online at www.annualcreditreport.com, by phone at 877-322-8228, or by mail. You can also obtain a free copy of your credit report from a credit reporting agency under certain other circumstances (e.g., if you have been turned down for credit). Alternatively, you can order a credit report (for a fee) at any time by contacting the agencies directly by phone, by mail, or through their websites. You will have to provide the credit reporting agency with certain identifying information (i.e., name, address, Social Security number, and date of birth) in order for it to locate your file and verify your identity.



How can I repair my poor credit?

Question:

How can I repair my poor credit?

Answer:

Your first step in repairing poor credit should be to obtain a copy of your credit report. The three major credit reporting agencies are Experian, Trans Union, and Equifax. You can obtain a copy of your report by contacting these agencies by phone, by mail, or through their websites. Check the report carefully for any errors and make sure that all the information contained in the report is correct.

Next, you can try mitigating the impact of any derogatory credit you may have on your credit report by adding positive account information to your credit file. Start by contacting creditors with whom you have a good credit relationship and give them permission to release your account information to credit reporting agencies. You should then contact the credit reporting agencies and provide them with the names and telephone numbers of the creditors with whom you have good credit. For a small fee, most credit reporting agencies will call your creditors and add the positive account information to your file.

Another option is to go directly to your creditors and try to clear your credit record. If your poor credit resulted from circumstances that were beyond your control (e.g., hospitalization, layoff), and you have reconciled your account since that time, you may be able to convince your creditors to upgrade your rating.

If you have bad debts that are current, you may be able to negotiate away poor credit by agreeing to pay off your debts over a period of time. Contact your creditors and propose a deal in which you will agree to a reasonable repayment schedule if they agree to upgrade your status with the credit bureau.

You can also add a statement to your credit report that tells your side of the story. You have the right to include a 100-word statement in your credit file. The statement should list any extenuating circumstances that could possibly mitigate the negative credit information in your credit report. Perhaps you were hospitalized for a period of time and were unable to pay your bills, or maybe you were laid off from your job. If your credit history shows that you typically pay your bills on time, this statement could help to explain an isolated instance or period of derogatory credit.

Finally, you can always choose to wait out your credit problems. With some minor exceptions, derogatory credit will be purged from your credit report within seven years. However, if you can show income stability and prompt payment patterns, your situation will improve within one to three years. Keep in mind that you should avoid incurring any more derogatory credit while you try to repair your poor credit. If you do incur derogatory credit, the seven-year clock resets and starts ticking again!



I can't pay my bills. Should I declare bankruptcy?

Question:

I can't pay my bills. Should I declare bankruptcy?

Answer:

If you're unable to meet your financial obligations, you should investigate a number of options before considering bankruptcy. If your income has been reduced (e.g., because of illness or unemployment), you might consider cutting down on your monthly expenses, taking advantage of unemployment and public assistance, and liquidating assets. Another option is to restructure your debts. Debt restructuring involves negotiating new repayment terms with creditors so you can meet your monthly expenses and pay off your debts within a reasonable amount of time.

You should consider hiring a professional credit counselor to assist you in restructuring your debts. Professional credit counselors will contact your creditors and attempt to negotiate affordable repayment terms for you. If you can't afford to hire a credit counselor, you may find help at your local Consumer Credit Counseling Service (CCCS) office or other nonprofit credit counseling service. These nonprofit companies provide basically the same services as a professional credit counselor but at little or no cost to you. Hiring a credit counselor now will help you even if you decide to declare bankruptcy later, because you may need to submit a certificate to the bankruptcy court that states you've received a briefing from an approved credit counselor in the six-month period prior to filing.

If you decide that bankruptcy is your only option, you may file for personal bankruptcy under Chapter 7 or Chapter 13. Chapter 7 bankruptcy can remove obligations to repay certain outstanding debts but requires you to liquidate certain assets and use the proceeds to pay creditors. You can only file under Chapter 7 if you pass an income eligibility test. Otherwise, you must file under Chapter 13 for relief, which institutes a payment plan to repay creditors over a three- or five-year period. A bankruptcy attorney can help you sort out your options.



How can I correct errors on my credit report?

Question:

How can I correct errors on my credit report?

Answer:

Under the Fair Credit Reporting Act, you have the right to have any incorrect or misleading information removed from your credit report. If an error appears on your credit report, you should contact the credit bureau and request a reinvestigation of the disputed information. If the error is not removed, you have the right to add a 100-word consumer statement to your credit bureau file to explain your side of the story. The three major credit reporting agencies are Experian, Trans Union, and Equifax. You can contact these agencies by phone, by mail, or through their websites.

Keep in mind that since mistakes do occur in credit reporting, you should check your credit report once a year as part of your financial planning process. Also, the more common your name is (e.g., John Smith), the more likely you are to have someone else's information added to your report.



Will debt consolidation hurt or help my credit rating?

Question:

Will debt consolidation hurt or help my credit rating?

Answer:

Debt consolidation can lead to an improvement in your credit rating by making your debt easier to manage. Sometimes, debt consolidation means taking a loan at a lower interest rate to pay off several smaller loans at higher interest rates. Making one payment instead of many may help you keep your debt under better control, make it easier for you to make timely payments, and thus improve your credit rating.

Although managing your debt will improve your credit record in the long run, consolidation can have a more immediate impact. For example, if you have 10 accounts in default on your credit report, your lenders will consider you a bad credit risk. But if you can pay off those accounts with a consolidation loan, you have eliminated the problem. Your new credit report will now show that you cured the defaults and retired the debts. And you have only one open account--your consolidation loan. As long as you stay current on the consolidation loan payments, your credit rating will be viewed more favorably than before.

Remember, your goal is to manage your debt by making your payments more affordable. You can do this by lowering your interest rate or increasing the number of months you have to pay off the debt. There is no point in consolidating if you don't achieve one or both of these goals--you'll want to be sure you can afford the consolidation loan and make the payments. Otherwise, you'll end up back where you started.

Although debt consolidation has its advantages, you must recognize that by extending the time to pay off your debt, you will ultimately be paying more in interest charges. Also, once you get a consolidation loan, you should consider closing some of your credit card accounts so that you can't simply run up your bills again.



How can I lower the interest rate on my credit card?

Question:

How can I lower the interest rate on my credit card?

Answer:

One way is to call your existing lender and try to negotiate a lower rate. Often, the threat of losing a customer and the associated income from your finance charges can inspire a card company to accept a lower interest rate and keep the relationship. Negotiation is most effective if you have a stable payment history with the company.

If your present card company won't negotiate, you can transfer your existing balance to a new lender with a lower rate. Be careful, however, that it isn't a teaser rate that's offered for a few months and then will be raised higher than your existing rate. Ask for a clear accounting of what the rate applies to (e.g., balance transfers, new purchases, cash advances), as well as all other card limitations and penalties. Find out if there is a transaction fee before you agree to the transfer.

Keep in mind that lenders are making it increasingly difficult to continuously "surf" for low credit card rates. Some card companies now restrict balance transfers during a set time (e.g., a year) after you sign up. If you try to transfer to another card during that period, you may be retroactively charged a higher rate.



How can I get credit if I have no credit history?

Question:

How can I get credit if I have no credit history?

Answer:

It's the old catch-22. You cannot establish a credit history without having credit, and you cannot get credit without a credit history. But if you work at it, this problem can be overcome. While you create a history, be sure your efforts will be reported to the credit bureaus.

Use the credit history of a family member or friend to leverage yourself into credit in your own name. If you are added as a joint party or authorized user to another person's credit card, the lender may report the account's payment history on your credit report.

If you have a checking account, ask your bank for overdraft protection (or cash reserve) privileges. With this feature added to your account, you can create credit by writing a check for an amount greater than the balance in your account (but not greater than the limit of your cash reserve line!). Alternatively, ask the bank for a small personal loan. As you repay these debts, you establish a credit history. Make sure the bank reports that history to the credit bureaus.

Secured credit cards are also a good way to get started. Your credit line is secured by your deposit in the bank, minimizing the creditor's risk. For example, if you deposit $500 in the bank, you get a credit card with a maximum limit of $500. As you use the card and make payments, you establish a credit history. These cards have high interest rates, but your goal is only to charge what you can afford to repay. As you repay the debt, you establish a repayment pattern seen by other creditors.

You may qualify for a department store charge card or gas card. Because these cards have lower credit limits and may be used only with the companies that issue them, the lending guidelines may be more liberal than those for major credit cards.

If you still have difficulty obtaining credit in your own name, consider a collateralized or cosigned loan. With a collateralized loan, the item you pledge as collateral (such as a car) minimizes the risk to the credit grantor. With a cosigned loan, your cosigner is equally liable for the balance. Spreading the responsibility for repayment in this fashion minimizes the lender's risk. Successful repayment of these types of loans can then be used to establish your own credit history.



How can I pay off my credit card debt?

Question:

How can I pay off my credit card debt?

Answer:

Certainly the best way to pay off your credit card debt is with a single payment. If you can find the money to pay off all your credit card debt, you'll get back on solid financial ground quickly and without paying additional interest.

The next-best method is to pay off the card with the highest interest rate first. You'll want to pay as much as you can to that account and then send the minimum payment due to each of the other accounts. When you've paid off one card, start paying on the card with the next highest interest rate. Focusing on one card at a time gives you clear financial goals, minimizes your interest expense, and creates a sense of satisfaction.

If available, you can use a home equity loan to pay off credit card debt. The interest on home equity loans is typically lower than credit card rates and is usually tax deductible. This can be an effective repayment method if you can handle it with discipline. However, these loans can be as easy to abuse as credit cards, particularly if you have a line of credit. Also, you run the risk of paying down the home equity loan at the same time you're running up more debt on your newly cleared credit cards. Remember, your home equity loan, unlike credit cards, will be secured by a lien on your home. If you can't make your payments, you'll be in default, and the lender can foreclose on your home.

A less aggressive way to pay off your debt is to transfer your balances to lower-rate accounts. Known as credit card surfing, this method works until you run out of lower-interest opportunities. However, it does allow you to reduce interest fees and pay more against your existing balance.

It's always best to control new spending and pay more than the required minimum payment whenever possible. Invariably, these cover little more than the finance charges. You continue to carry the bulk of your balance forward for many years without actually reducing that balance. Ideally, charging only what you can afford to pay off each month gives you the best benefits of a credit card and few of the drawbacks.



I've finally paid off my credit cards. Should I close them or leave them open with zero balances?

Question:

I've finally paid off my credit cards. Should I close the accounts or leave them open with zero balances?

Answer:

It's a good idea to close redundant or unused accounts you do not consider necessary. Here are a few reasons why:

• If credit is easily available, you may be tempted to use it. Any impulsive purchases could quickly mount up and result in serious debt problems.

• Open accounts may be used fraudulently if your account numbers are stolen or your cards are lost.

• You may have to pay annual fees for the cards even if you don't use them.

• Whether used or not, open accounts may create trouble when you apply for other credit such as mortgages or loans. Lenders commonly review your credit history and may see you as a credit risk if you have multiple open accounts with a large amount of available credit. Potentially, you could still use them and build up unacceptable levels of debt.

It's best to cut up and return to the issuer any cards you don't want. Refuse to accept renewal cards you don't plan to use. You'll want to contact each card issuer to determine specific account closing requirements. Ask for a confirmation letter of the closing and check that it is listed on your credit report as having been "closed at the customer's request."



I get a lot of credit card offers. How can I tell which one is best?

Answer:

Start by carefully reading the advertisement or application you've seen or received. It may seem like a lot of jargon, but that fine print contains important information about terms and costs. Here are three points to consider when comparing credit card offers:

Annual percentage rate (APR): What interest rate will apply to outstanding balances? If you plan to carry a balance, it's especially important to choose a card that has a low APR. But don't be fooled by a low introductory rate. It may apply for only a few months, and only to balance transfers, not new purchases. It's essential to understand what rate will apply once the introductory period is over.

Find out, too, if the APR will change over time. If the rate is variable, you can expect it to go up or down periodically because it's tied to an index (often the prime rate) that changes. If the rate is fixed, it won't fluctuate, but that doesn't mean it will stay the same forever. A credit card issuer can change your rate at any time, as long as you're given written notice 45 days in advance of the rate change. And find out what will happen to your APR if you make a late payment. Some card issuers send your rate skyrocketing if you pay your bill late just one or two times. (Note: After February, 2010, a creditor generally may only raise the rate on an existing balance if the account is 60 days past due.)

Grace period: How long will you have to pay your balance in full before interest starts accruing? If you plan to pay off your balance every month, you'll want to look for a card that offers a relatively long grace period (e.g., 25 to 30 days).

Fees: What fees will apply? If you plan to pay off your balance every month, avoid signing up for a card that has an annual fee. If you plan to carry a balance, it may be worth paying a fee if the interest rate is low enough. And watch out for hidden transaction costs. Compare the fees you'll be charged for transferring your balance, using your card to get a cash advance, exceeding your credit limit, or paying your bill late.

Finally, even if you've carefully read through the offer, you may still have questions. If so, call the credit card issuer before signing an application.



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