Seven Facts about Credit Cards

It’s one of the top common items most consumers carry in their wallets. Next to a driver’s license and photos, you’ll find credit cards. This method of payment is now more popular than paying by cash or check. Here are some things you should consider when using your credit cards including how credit cards can affect your credit rating.

1. Closing credit card accounts may not necessarily raise your credit score.
   Closing credit card accounts can work both negatively or positively for your score. It may hurt your credit score by increasing your balance-to-limit ratio. However, it may improve your credit score by reducing the total number of open accounts (lenders may see too many open accounts as the potential for consumers to accumulate high debt). And keep in mind that accounts that are older show your established history with credit, which can positively influence your credit score if they are in good standing, so weigh your options before making any decisions.

2. Creditor inquiries can lower your credit score; however, personal inquiries will not.
   Personal or soft inquiries, such as checking your own credit report and score, are not included by lenders when calculating your credit score. So when you check your own report, you will not be lowering your score. Although hard inquires, such as those made by lenders checking your credit when you apply for a credit card or loan, are included in your credit score calculation and should be kept to a minimum. Lenders often view too many inquiries as negative.
   The borrowers who are in the most danger have two major challenges. First, they may end up with more debt than they expected – owing more than their house is worth. Second, some have interest-only, adjustable-rate mortgages (ARMs), many with low “teaser rates.” Eventually, after anywhere from one month to five years, the ARM enters its rate-adjustment period and the loan is reset with a higher rate. To avoid being caught off guard, it’s a good idea to review all the information on any loan documents and to be aware of any potential risks. Remember, late payments can have a negative effect on a credit score, potentially reducing a consumer’s chances of obtaining more competitive loan rates.

3. Secured cards vs. unsecured cards.
   A secured card is a credit card backed by money that you deposit into a bank account that is linked to the issuing credit card company. The account serves as security for the card and is often offered to consumers who have poor credit or limited credit history. Unsecured cards do not require a security deposit. If you find yourself having trouble obtaining an unsecured credit card, it’s often recommended that you apply for a secured credit card to help build up a positive credit history before applying for unsecured cards again.

4. Know the difference between charge cards and credit cards.
   Charge cards require you to pay the balance in full each billing period, while credit cards allow you to borrow money and repay it with interest. Charge cards do not charge an interest rate and may help you spend less knowing you have to pay the bill in full.

5. Different lenders use different criteria when offering credit cards to consumers.
   You may find some lenders are willing to offer you a line of credit, while others may not. In addition to reviewing the information on your credit report, lenders will also apply their own selection requirements when deciding whether or not to extend an individual a line of credit, as well as what interest rate and other terms to extend to the applicant. It is up to the lender to determine whether you are a good credit risk. If you are denied credit, keep in mind that the lender must supply a copy of your credit report and explain why you were declined.

6. Credit and charge card transactions are protected by the Fair Credit Billing Act.
   The Fair Credit Billing Act (FCBA) provides cardholders the right to dispute charges under certain circumstances and also limits cardholder liability in the event of fraudulent transactions. Specifically, consumers are not liable for any charges incurred after they’ve reported their card stolen. You may be liable for a portion of charges that occur before they report the card missing, typically about $50, as long as the cardholder reports the theft within a reasonable period of time (24-48 hours).

7. Pay more than the minimum payments towards your balance each month.
   Creditors make money from interest payments from their cardholders. When creditors give you a minimum payment option, be aware of how long it will take to pay off that debt if you only pay the minimum and how much extra interest you’ll be paying over time. For example, if you owe $2,000 on a credit card, and assuming there are no additional charges, it will take 52 payments of $50 a month to pay it off. However, if you paid $100 a month, it will take approximately 23 payments – less than half the payments if you were to pay only half as much.