Credit 101

Posted by Caitlin on November 11th, 2008

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If you are a high school or college student, now is the best time to begin establishing a credit history, and that means that it’s also time to learn how to use credit responsibly. You may have one or two credit cards already, or perhaps you’re just beginning to consider applying for your first. Either way, it is crucial to be informed about credit before making financial decisions that will impact you for the rest of your life.

Building a credit history may not seem like a priority for you right now, but planning ahead will benefit you immensely in the future. Paradoxically, in order to receive any type of credit, you will nearly always be required to demonstrate a history of using credit responsibly. This means that your credit can determine whether or not you can qualify for a student loan or an auto loan, for example, and if you do receive a loan, your credit will impact your interest rate. Your credit will also determine whether or not you can lease a car, and it may affect your payments. Renting an off-campus apartment will require a credit check. Some utilities, including cell phone plans, require a credit check and if you have poor credit, they may demand a hefty deposit or even refuse service. Sometimes, potential employers check credit reports. Good or excellent credit is required in order to qualify for credit card offers with the best terms and rewards programs.

Your credit report is a record of your payment history for all types of loans and lines of credit. It includes information on whether you pay your bills on time, where you live, and whether you’ve ever filed for bankruptcy or been sued. If you pay your bills on time every month and stay within your credit limits, you should have a high credit score. If you have defaulted on loans, have a history of late bill payments, or carry a large amount of debt in proportion to your available credit, your score will be lower. To learn more about credit reports and scores, see our FAQ.

Your credit score is similar to your GPA. If you earn very poor grades as a freshman, it will be possible, but more difficult, to raise your GPA when you are a senior. But if you earn good grades during your first few semesters, it will be much easier to maintain a high GPA throughout the rest of your time in school. You can repair poor credit through hard work and diligence, but it is much better to establish a good credit history, and a high credit score, when you are young and have a blank slate.

It is not enough to pay your bills on time and make sure to stay well below the limits on your credit cards. If you are serious about building and maintaining good credit, you should also review your credit report from time to time, and you should keep a close watch on any open credit accounts. This is important because of the risk of identity theft.

Identity theft occurs when a criminal obtains sensitive, personal information such as a credit card number, bank account number, or Social Security number, and uses the stolen data to fraudulently open new accounts in someone else’s name. Identity thieves frequently target children, in which case the crime often goes undiscovered for many years, until the victim grows up and attempts to open his or her first credit account only to find that his or her credit has already been destroyed. Living in a dorm at college can also put you at additional risk for identity theft, since more people are likely to have access to your mail, your credit and debit cards, any personal documents you might have, and your computer.

Earlier this year, Rolling Stone published a story about a Drexel student who started out shoplifting but soon moved on to stealing Social Security numbers, driver’s license numbers, bank account information and passports from her neighbors and using the pilfered information to open credit cards and bank accounts in other peoples’ names. Her boyfriend rigged all the Internet accounts in their building to run through his own computer and installed Spyware on their neighbors’ computers. The couple created fake driver’s licenses and stole credit and debit cards from their friends at Drexel and the University of Pennsylvania. Their story shows how easy it can be to steal peoples’ identities, especially in a college setting.

The best way to detect and prevent identity theft is with an identity theft protection service, which will either set fraud alerts with the credit bureaus to prevent new accounts from being opened in your name without your approval, or simply monitor your credit file and alert you to any changes. To learn more about identity theft protection services, see our reviews and comparison chart.

Another option is to sign up for a credit monitoring service, which will provide you with free copies of your credit report and in some cases, your credit score, and explain what factors are helping or hurting your credit score. A credit monitoring service will also alert you to any chances in your credit file. To learn more about credit monitoring services, see our reviews and comparison chart.

Once you have checked out your credit report to make sure there are no negative or erroneous items that need to be dealt with, you may decide that it’s time to apply for your first credit card. There are many credit cards specifically designed for students who have no prior credit history. It is a good idea to begin establishing your credit history with a student credit card, because if you wait until after you have graduated, you may have difficulty qualifying for any credit card offers. The sooner you begin establishing credit, the longer and the better your credit history will be. A few years can make a dramatic difference in your credit score, especially when you are young and your credit report does not yet contain a great deal of information.

There are many other benefits that will come with having your first credit card, in addition to establishing credit and improving your credit score. A credit card is invaluable in case of emergencies. Sometimes, a credit card is required to make reservations at hotels, restaurants, salons, or spas. When shopping, and especially when shopping online, it is much safer to use a credit card than a debit card, because credit cards give you the chance to dispute a charge that you believe to be incorrect. With a debit card, your money will already be gone before you recognize a problem. The ability to dispute a charge can also come in handy in the event of a disagreement with a retailer.

Most credit cards come with a number of other perks. Many offer extended warranties, which means that if you buy something with your credit card and the item breaks after the merchant warranty has expired, your credit card company may still refund the purchase price. There is also retail purchase protection, which will reimburse you up to $500 if a purchase is stolen, destroyed, or accidently broken within the first 90 days. Most credit cards also offer automatic car rental insurance and roadside assistance, and some have a dedicated concierge service to assist cardholders. Certain credit cards give cardholders access to airport lounges or tickets to exclusive events.

When selecting a credit card, it is important to read the terms carefully and to compare a number of credit card offers before making a decision. Some schools allow credit card companies to set up tables on campus, where credit card representatives lure students with t-shirts, candy bars, or other free gifts. You should beware of these attempts to convince you to apply for a credit card without carefully considering the terms. Having several credit cards, especially at a young age, is often a recipe for disaster.

There are many factors to consider when comparing credit card offers. (And a free t-shirt should not be one of them!) The ideal credit card would offer cardholders a low APR, no annual fee, and an excellent rewards program. Realistically, though, it is more likely that you will have to decide which of these criteria are most important to you when considering credit card terms. Other factors to consider are the credit limit and the various fees and finance charges associated with the card. Take your own financial situation into account when comparing offers. Are you likely to carry a balance, or will you pay your credit card bill in full each month? Realistically, will you take advantage of a points or travel miles rewards program, or would you be better off with cash rebates?

NextAdvisor.com’s student credit card reviews explain the more significant differences between different credit card offers, and should be helpful in determining what type of card is right for you. And for more information about credit cards plus definitions for many common credit related terms, see our credit card FAQ page.

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Say goodbye to inactive credit cards

Posted by Caitlin on October 6th, 2008

Credit card companies aren’t just lowering credit limits in response to the economic downturn. They are also more likely to cancel inactive cards. This can lower your credit score by decreasing your amount of available credit, but also by shortening your credit history. If you have one or more credit cards that haven’t been used for a while but are still open, consider whether or not you need to hang on to them before the credit card company makes the decision for you. If the unused card has a very high credit limit or is one of your oldest cards, consider using it for occasional small purchases in order to keep it active and open. Newer cards or cards with lower credit limits are less essential to your FICO score, so you may consider closing these types of unused credit cards, or allowing the credit card company to do it for you if they so choose.

To learn more about credit cards, see our reviews and comparisons.

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Why Monitoring Your Credit Score Is More Important Than Ever During The Credit Crisis

Posted by Erik on October 2nd, 2008

As if life weren’t hard enough already during this economic downturn, another side effect of the credit crunch is that your credit score could go down even without any negative information being added to your credit report! That’s right, even if you’re able to continue to pay all your bills on time, and pay off all your credit card balances in full, your credit score may still go down.

Here’s why: a key component of your credit score is the percentage of your available credit that you are using. With lenders, such as credit card companies, becoming more strict in their lending standards, many of them are already lowering credit limits for huge numbers of their customers. Their rationale is that even though nothing has changed with the customer’s credit profile, the bad economy makes the customer a worse credit risk than they were in a good economy.

Okay, fair enough, but now someone that had $25,000 in available credit might only have $15,000. And that person might have used on average $7,500 of credit each month. Even though that person isn’t doing anything differently, they just went from using 30% of their credit to 50%. That’s a big difference that will likely lower their credit score significantly!

Worse yet, since lending standards are now more strict, qualifying for the same loan today vs. a year ago requires a higher credit score. But yours will probably be lowered without even doing anything. Of course, your credit score may go down even further if you’re unable to pay some of your bills on time.

If this all sounds pretty bad, well, it is. But there are some things you can do about it. First, check your mail. By law credit card issuers must notify you of a change to your credit limit.

Second, monitor your credit score. The best way to do this is to sign up for a credit report and score monitoring service. You can read our comparison of credit monitoring services to find the best one for you. Our top pick is Identity Guard, which gives you reports and scores from all three credit bureaus every quarter, monitors any changes to your credit report at the three bureaus daily, and gives you an amazing array of identity theft protection and internet security features. If you think you might be making a big purchase requiring a loan in the near future, you might opt for CreditCheck Total, which gives you unlimited access to all three credit reports and scores, which means you can check your updated credit score every day if you want. All our top recommendations offer free trials so there is no commitment and you can get your credit scores for free.

Third, if you know that you currently have a good credit score, apply for a new credit card. While the limit may not be as high as you would have qualified for a few months ago, whatever credit you do get can help replace the lowered limits on your existing cards. This is an even better idea if you are carrying a balance on your credit card, as you can take advantage of low or 0 introductory balance transfer rates. Read our comparison of the best balance transfer cards to find the best one for you or if you don’t want to transfer a balance, check out our Editor’s Choice of the best credit cards in different categories. Of course, if you’re credit isn’t good, don’t apply for a credit card you think you might be declined for because applying for new credit can lower your score slightly.

We hope you find this information helpful. Check back often or consider subscribing to our RSS feed or email list as we will continue to provide tips to help consumers get through these tough economic times.

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Department of the Treasury’s online game teaches kids about credit

Posted by Caitlin on September 30th, 2008

The Ad Council recently launched a new website on behalf of the U.S. Department of the Treasury in order to educate young people about how to use credit responsibly. Players gather information about debt management, credit history and credit cards in order to progress through the game and unlock “Room 850″ in a virtual hotel. You can play The Bad Credit Hotel and get valuable tips on managing your credit at controlyourcredit.gov.

And see our FAQs, reviews and comparisons to learn about credit monitoring services or credit cards.

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JD Power and Associates 2008 Credit Card Satisfaction Survey

Posted by Caitlin on September 4th, 2008

Yesterday, JD Power and Associates released their 2008 Credit Card Satisfaction Survey. American Express topped the list for the second year in a row. Discover Card came in at second place. Cardholders named AmEx, Chase and Discover as their favorite rewards cards. AmEx, US Bank and Discover were rated the best in terms of fees and rates. AmEx, Discover and Chase had the best call centers, and customers reported the fewest problems with Target Visa, Discover and WaMu. Customers found National City, WaMu, Chase and Target Visa to be most frequently accepted.

JD Power and Associates also found that 72% of cardholders participate in some type of reward program and that hotel stays were the most satisfying type of reward, followed by cash rewards. In addition, the survey showed that one quarter of cardholders don’t know what, if any, additional benefits are offered with their credit card and that one third haven’t used any of these additional benefits in the past year. Those users are less satisfied with their credit cards overall than cardholders who do take advantage of these additional benefits.

To learn more about credit cards and various credit card offers, see our reviews and comparisons.

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What is an APR?

Posted by Caitlin on August 21st, 2008

Your APR, or annual percentage rate, is the yearly interest rate you will pay if you carry a balance on your credit card. You will also be charged interest if you transfer a balance from another card or take out a cash advance. One credit card may have several different APRs. There may be one percentage rate for purchases, a different rate for balance transfers and another for cash advances. The annual percentage rates for balance transfers and cash advances tend to be higher than the purchase APR.

Many credit card offers advertise an introductory APR, which is usually a low interest rate or even no interest whatsoever for the first few months. Keep in mind that this low APR will go up after the introductory period ends. If you fail to pay your credit card bill on time, you may cause your introductory rate to expire earlier than promised. There are also tiered APRs, in which higher outstanding balances are subject to higher interest rates. And there are penalty APRs, which are higher interest rates that go into effect if you are late making payments.

You may have a “variable rate” APR or a “fixed rate” APR. If you have a fixed rate APR, it will rarely change, and your credit card company must notify you before it increases. If you have a variable rate APR, it will change based on either the prime rate or the Treasury Bill rate. Anytime the Federal Reserve raises or lowers the prime rate, your credit card APR will rise or fall accordingly.

Credit card offers often advertise a range of different interest rates for a specific credit card. Generally, only customers with excellent credit will qualify for the lowest of these interest rates, while other customers may be approved for the credit card, but will be charged a higher APR.

To learn more about choosing the right credit card for you, view our credit card reviews and comparisons.

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Give me some credit!

Posted by Caitlin on August 20th, 2008

Do you spend money? Do you shop online? Do you make hotel reservations? If so, chances are you have a credit card. But with so many credit card choices available, it can be nearly impossible to know which one is best for you. There are low APR credit cards, there are balance transfer credit cards, and of course there are credit cards that offer you almost every type of reward you can imagine. Not to mention how difficult it can be to understand the different credit card terms.

Today we are launching reviews and comparisons of several different types of credit cards, including gas rewards cards, cash rewards cards, travel rewards cards, and points rewards cards. These comparisons should make it easier to compare the terms of different credit cards and figure out which is best for your unique financial situation. We have also created a FAQ that should help readers understand their credit card terms and learn how to use their credit responsibly.

In the near future we will be expanding our new credit card guide to include other types of credit cards. In the meantime, if you are interested in rewards cards, check out our new reviews and comparisons.

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Helpful hints about credit cards

Posted by Caitlin on August 20th, 2008

The Consumerist recently posted 10 Things You Might Not Know About Your Credit Card and 10 Credit Card Company Tricks to Beware. Credit card terms and policies tend to be long and complicated, but The Consumerist addresses some common questions as well as some that you might not even think to ask.

Some of these hints might surprise you. Did you know that as long as the back of your card is signed, merchants cannot require you to show your ID? Or that merchants are not supposed to accept your card if you have written “See ID” in lieu of a signature?

In order to use credit responsibly, it’s crucial to be an informed consumer. To learn more about credit cards, see our reviews and comparisons.

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Why use a balance tranfer card?

Posted by Caitlin on August 20th, 2008

A balance transfer card is any credit card that allows cardholders to transfer a balance from a different credit card. Balance transfers can be a very helpful and effective means of managing credit card debt. If you have a credit card with a high APR and you are unable to pay your balance in full, you may be able to transfer that balance to a different credit card with a lower APR. This will allow you to avoid high interest rates while you work to pay off your credit card debt. However, there are also risks associated with balance transfers. It is essential that you read and understand the terms of your balance transfer card, and to use your credit responsibly.

Many credit cards offer a 0% introductory APR for balance transfers. This type of offer is ideal if you are planning to transfer a balance from a credit card with a high interest rate. But keep in mind that the 0% interest rate does not last forever. Typically, a 0% introductory balance transfer APR lasts for the first 3 to 12 months. The length of the introductory period depends on the card, but also on your credit history. Applicants with better credit will sometimes be offered a longer introductory period. Obviously, you should look for the longest introductory period possible. Once the introductory rate expires, the transferred balance will usually be subject to the purchase APR. Also, be aware that a single late payment can cause your introductory rate to expire prematurely.

When considering a balance transfer, take into account the fact that nearly every balance transfer card charges a transfer fee, usually around 3%. Some cards place a cap on this fee, but others do not.

If you decide that a balance transfer is a good strategy for managing your credit card debt, read the fine print and always pay your credit card bill on time. Do your best to pay off the entire balance before the introductory rate expires. Moving a large balance from one balance transfer card to another is a dangerous game that is likely to backfire in the long run.

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