Imagine walking into a bank and asking for a loan to buy a pair of socks.
"Sure," says your friendly neighborhood banker. "Just sign here. By the way, your annual percentage
rate will be 20%, and there's a stiff penalty for late payment."
The idea of taking out a high-interest loan to buy routine items such as socks sounds silly, but credit-
card holders who don't pay their bill in full each month do exactly that when buying household items
or restaurant meals.
"If you don't have the money to pay for an item now, you probably won't have it after the credit-
card bill arrives," says Robin Holland, senior vice president for customer service operations at
Equifax (nyse: EFX - news - people ) in Atlanta. "We need to be wise about the use of credit. If you
can't pay for an item in a reasonable amount of time, you shouldn't be charging it."
Many people think of a credit card as free money, forgetting that a bank isn't the National
Endowment for the Arts. Think of a credit card as an unsecured loan from the bank that allows you
to buy goods and services now and pay later.
If you're smart, pay the balance in full each payment cycle, and use the bank's money interest free
for about a month.
Those who don't pay the bill in full each month and make additional purchases soon find themselves
clobbered by interest payments on a ballooning balance. This is toxic to your financial health and can
pound your credit rating.
A credit card offers great convenience: You don't have to show a half-dozen pieces of ID (or so it
seems), you don't have to carry large amounts of cash, you can consolidate payments, and you have
a record of purchases. A credit card is needed to complete some transactions--try buying an airline
ticket, renting a car or shipping an overnight package with cash.
Banks have done a terrific job marketing these pieces of plastic as status symbols and tickets to
freedom. Don't buy into the hype--think of credit as a commodity and shop for the best deal. Don't
be bashful about playing one bank off against the other to get the best price.
Before you sign up for a credit card, check the terms and conditions that will determine your overall
cost. You have to be nuts to pay an annual fee for the privilege of carrying a credit card, so here's a
hot tip: Don't. If a bank wants to pick your pocket before issuing a card, simply deal with another
bank. Most creditors want your business and won't charge an annual fee for the card. Write this
down, guys: Paying a hefty fee for a "gold" or "platinum" or even a "blue" card won't get the babe,
and the money could be better spent on, say, a dozen long-stemmed roses.
Check the annual percentage rate, or APR. This is the cost of the credit shown as a yearly rate. The
creditor must disclose this figure to you.
Remember that many banks offer a low introductory rate that climbs steeply in a few months.
Beware--and read the fine print.
Some creditors offer variable rates tied to interest rates or other gauges of the economy. This isn't a
problem as long as you're paying attention. But who tracks this stuff along with the clatter and
chatter of daily living? This can be an invitation to a beheading--yours.
The "periodic rate" is the charge applied to your outstanding balance to calculate the monthly
finance charge for each collection cycle. This can be a killer if you let the unpaid balance build. The
smart user of credit pays the bill in full each month, saving big bucks and driving the banks crazy.
Ask about transaction fees. Banks often charge a fee if you use the card to get a cash advance, make
a late payment or exceed the credit limit.
Limit yourself to one major card with a credit limit you can handle. Some people flash a wallet full of
credit cards as if it's proof that creditors love them. Hint: The bank wants your money--make them
jump for it.
Keep monthly charges low. Some recommend no more than 30% to 50% of the credit limit.
Be sure to pay the amount due in full each month. This saves you money and burnishes your credit
report. A solid credit report is the key to securing a mortgage or a car loan, often at a lower rate.
Always keep your credit-card account number and the phone number of the creditor's service line at
home. If your card is lost or stolen, contact the bank immediately to cancel the account. Your liability
is limited by law to $50 and in most cases, you won't be asked to pay a cent if you report the theft
promptly.
A regular review of your credit report is vital to maintaining a solid credit rating and guarding against
identity theft. Typically, a credit report contains personal identifying information, a credit summary,
account history, inquiries, collections and public records. The three major credit-reporting agencies,
Equifax, TransUnion and Experian, collect similar information to help businesses answer a basic
question: Is the credit applicant a good risk?
Your credit score is based on your payment history, outstanding debt, length of time you've had
credit, types of credit you have and the number of inquiries. Typically, the score is reported on a
scale of 300 to 900. The median score is about 725.
Here are seven basic points to remember when managing your credit-card account:
1. Receipts: Save your receipts and reconcile them with your monthly credit-card statement. Report
any discrepancies immediately.
2. Regular Payments: Plan to pay the balance in full each month. If you can't do so now and then,
don't make any additional purchases with the card until the balance is zero.
3. Avoid Late Charges: Always make the payment before the due date to avoid late charges and
interest. Think of the additional charges as a tax on stupidity or sloth--and avoid them.
4. Routine Purchases: Don't use your credit card for routine trips to the supermarket or drug store.
Instead, use a debit card that will automatically withdraw money from your checking account. This
will help keep the credit-card balance low each month.
5. Over The Limit: If you exceed your credit limit, call the bank immediately and make arrangements
to pay down the balance and get it below your limit. This may mean you can avoid getting hit with an
additional fee for exceeding your credit limit.
6. Guard Your Information: Don't give your credit-card number to anyone over the phone who calls
on the pretext of "verifying" your personal information or "correcting" a problem with your account.
It's a scam--and it's a dead bang certainty that phony charges in your name will pile up almost
immediately.
7. Bad Credit History: If your payment history has been poor in the past, consider opening a secured
credit account with a major bank. Typically, the amount you can charge each month is backed by
your deposits at the bank. The credit limit is often small, but regular payments will help you build a
good credit history and strengthen your application for an unsecured card in the future.
Equifax and the Web sites of major banks offer solid tips on how to establish and use credit wisely,
including Wells Fargo (nyse: WFC - news - people ), JPMorgan Chase (nyse: JPM - news - people ),
Bank of America (nyse: BAC - news - people ) and Citigroup (nyse: C - news - people ).
"If you get behind on your payments, contact the creditor and make arrangement to pay the balance
due as quickly as you can," says Equifax's Holland. "Don't let the account go to collection. You don't
need to close the account--you need to pay off the balance due."
Using credit cards wisely
"I think money was stolen from my card" or "I might have blocked my card in the ATM" - these are
frequent problems that bank customer-support officers usually hear from agitated clients. Incorrect
use of credit cards or wrong interpretations of their functions are frequent even after tens of years
of credit-card extensive use. Actually, there are 4 most frequent causes for problems; one is related
to overspending, the second is about missing money; this is usually connected to the 3rd problem -
unauthorized use and finally there is the issue of forgotten information. All these problems are
interconnected and can lead to serious financial problems. However, there are a few simple things
that you can do in order to avoid hassle.
First and foremost, remember that your credit card has a limit. When you open a credit line you will
be given a certain credit limit that can vary from twice your monthly income to 3 or maybe 4 times
that income, depending on past credit history. However, do not spend more than you can pay back.
At the end of each month you will have to pay-back the borrowed money and there will be no
exceptions from the rule. So lesson number one is “spend within limits”.
The second thing you need to do is keep a record of your expenditures. Keep bank statements,
receipts and carbons in a safe place and at the end of each month make a calculation of your
deposits and withdrawals. If there is any discrepancy between the two, make sure to contact your
issuer bank immediately and solve the situation. Most people find out that they have forgotten
about a certain payment that was made with the card, yet you may find out more important
information than this.
This brings us to the next issue - the unauthorized use of credit cards. This is a wide problem mainly
due to theft. It is safe to keep your credit cards in a wallet, separately from any other papers so that
you do not lose cards; it is also recommended that you make sure there is no one watching over
your shoulder when you type you personal identification number and off course there is the rule of
never giving out the PIN to anybody. Unauthorized use is not only related to theft. Young children
should never be given the number and/or the PIN of a credit card. If they are still not aware of the
value and importance of money you may find yourself paying for useless items or services. So rule
no.2 is Never Give out Your PIN.
There are many things we need to remember and keep track of. One of these things is credit card
information such as name of issuer, year and month of expiration, credit card number and PIN and
the help-line phone number. If you feel there is too much data to memorize it is best to have
everything written down and kept in a safe place like a deposit box or your telephone - there are
telephones that offer a special notebook feature which can only be accessed by introducing a code
and where you can store data safely. Therefore, another thing you need to do is Keep Records of
Important Information.
Managing credit cards is not child's play. You will need to keep good track of your money if you do
not want to overspend or lose track of expenditures. You also need to learn that your money is your
business and thus attention needs to be paid when giving out credit card identification information.
Last, but just as important, you need to keep in handy support-centre contact information in case
you need to report irregularities or you have questions to ask. Attention and common sense is
actually all you need in order to use a credit card wisely.
