| A credit card is a great financial tool. It can be more convenient to use
and carry than cash, and it offers valuable consumer protections under federal law. At the
same time, it's a big responsibility. If you don't use it carefully, you may owe more than
you can repay, damage your credit rating and create credit problems for yourself that can
be difficult to fix. Chances are your mail is full of offers from credit card issuers.
How do you know if the time is right for a credit card? Here is some important information
that may help you determine whether you're ready for plastic, what to look for when you
select a company to do business with, and how to use your credit card responsibly.
Qualifying for a Credit Card
If you're at least 18 years old and have a regular source of income, you're well on
your way to qualifying for a card. But despite the invitations from card issuers, you'll
still have to demonstrate that you're a good risk before they grant you credit. The proof
is in your credit record. If you've financed a car loan or other purchase, you probably
have a record at a credit agency (CRA) (The most common type of CRA is the credit bureau).
This credit history shows how responsible you've been in paying your bills and helps the
credit card issuer decide how much credit to extend.
Before you submit a credit application, get a copy of your report to make sure it's
accurate. Contact the credit bureaus listed in the telephone directory under
"credit" or "credit rating and reporting." Because more than one
credit bureau may have a file on you, call each until you locate all the agencies
maintaining your file. The three major credit bureaus are:
Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
1-800-685-1111
http://www.equifax.com
Experian (formerly TRW)
P.O. Box 949
Allen, TX 75013-0949
1-888-EXPERIAN (397-3742)
http://www.experian.com
Trans Union
P.O. Box 390
Springfield, PA 19064-03090
1-800-916-8800
http://www.tuc.com
Anyone who takes action against you in response to a report supplied by a CRA - such as
denying your application for credit - must give you the name, address and telephone number
of the credit bureau that provided the report.
Establish a Good Credit History
Suppose you haven't financed a car loan, a computer, or some other major purchase. How
do you begin to establish credit? First, consider applying for a credit card issued
by a local store and use it responsibly. Ask they report to a credit bureau. If they do -
and if you pay your bills on time - you’ll establish a good credit history.
Second, consider a secured credit card. It requires that you open and maintain a
bank account or other asset account at a financial institution as security for your line
of credit. Your credit line will be a percentage of your deposit, typically from 50 to 100
percent. Application and processing fees are not uncommon for secured credit cards. In
addition, secured credit cards usually carry higher interest rates than traditional
nonsecured cards.
Third, consider asking someone with an established credit history -- perhaps a
relative -- to co-sign the account if you don't qualify for credit on your own. The
co-signer promises to pay your debts if you don't. You'll want to repay any debt promptly
so you can build a credit history and apply for credit in the future on your own.
A positive credit history is an asset, not only when you apply for a credit card, but
also when you apply for a job or insurance, or when you want to finance a car or a home.
If Your Application Is Denied
If you're turned down for a card, ask why. It may be that you haven't been at your
current address or job long enough. Or that your income doesn't meet the issuer's
criteria. Different credit card companies have different standards. But if you are turned
down by several companies, it may indicate that you are not ready for a credit card.
If you've been denied credit because of information supplied by a credit bureau,
federal law requires the creditor to give you the name, address and telephone number of
the bureau that supplied the information. If you contact that bureau within 60 days of
receiving the denial, you are entitled to a free copy of your report. If your file
contains accurate negative information, only time and good credit habits will restore your
credit-worthiness. If you find an error in your report, you are entitled to have it
investigated by the credit bureau and corrected at no charge.
You should dispute any inaccuracy in your report with the credit bureau and also with
the company that furnished the information to the credit bureau.
Get the Best Deal
Fees, charges, and benefits vary among credit card issuers. When you're choosing a
credit card, shop around. Compare these important features:
- Annual percentage rate (APR). The APR is a measure of the cost of credit,
expressed as a yearly interest rate. Check out the "periodic rate," too. That's
the rate the issuer applies to your outstanding balance to figure the finance charge for
each billing period. For example, if you have an outstanding balance of $2,000, with 18.5
percent interest and a low minimum monthly payment, it would take over 11 years to pay off
the debt and cost you an additional $1,934 just for interest, which almost doubles the
total cost of your original purchase.
- Grace period. This is the time between the date of a purchase and the date
interest starts being charged on that purchase. If your card has a standard grace period
you have an opportunity to avoid finance charges by paying your current balance in full.
Some issuers allow a grace period for new purchases even if you do not pay your balance in
full every month. If there is no grace period, the issuer imposes a finance charge from
the date you use your card or from the date each transaction is posted to your account.
- Annual fees. Many credit card issuers charge an annual fee for granting you
credit, typically $15 to $55. Some issuers charge no annual fee.
- Transaction fees and other charges. Some issuers charge a fee if you use the card
to get a cash advance, if you fail to make a payment on time, or if you exceed your credit
limit. Some may charge a flat fee every month whether you use the card or not.
- Customer service. Many issuers have 24-hour, toll-free telephone numbers.
- Other benefits. Issuers may offer additional benefits, some with a cost, such as:
insurance, credit card protection, discounts, rebates, and special merchandise offers.
Kinds of Credit Accounts
Credit grantors generally issue three types of accounts. The basic terms of these
account agreements are:
- Revolving agreement. A consumer pays in full each month or chooses to make a
partial payment based on the outstanding balance. Department stores, gas and oil
companies, and banks typically issue credit cards based on a revolving credit plan.
- Charge agreement. A consumer promises to pay the full balance each month, so the
borrower does not have to pay interest charges. Charge cards, not credit cards, and charge
accounts with local businesses often require repayment on this basis.
- Installment agreement. A consumer signs a contract to repay a fixed amount of
credit in equal payments over a specific period of time. Automobiles, furniture and major
appliances often are financed this way. Personal loans usually are paid back in
installments, too.
Protect Your Credit
Once you get a card, sign it immediately so no one else can use it. Note that
the accompanying papers have important information, such as customer service telephone
numbers, in case your card is lost or stolen. File this information in a safe place.
Call the card issuer to activate the card. Many issuers require this step to
minimize fraud and to give you additional information.
Keep your account information to yourself. Never give out your credit card
number or expiration date over the phone unless you know who you're dealing with. A
criminal can use this information to steal money from you, or even assume your credit
identity.
Keep copies of sales slips and compare charges when your bill arrives. Promptly
report in writing any questionable charges to the card issuer.
Don't lend your card to anyone, even to a friend. Your credit privilege and
history are too precious to risk.
You're Responsible
While a credit card makes it easy to buy something now and pay for it later, you can
lose track of how much you've spent by the time the bill arrives if you're not careful.
And if you don't pay your bill in full, you'll probably have to pay finance charges on the
unpaid balance. What's more, if you continue to charge while carrying an outstanding
balance, your debt can snowball. Before you know it, your minimum payment is only covering
the interest. If you start having trouble repaying the debt, you could tarnish your credit
report. And that can have a sizable impact on your life. A negative report can make it
more difficult to finance a car or home, get insurance, and even get a job.
Federal Protections
Federal law offers the following protections when you use credit cards.
- Errors on your bill. You must notify the card issuer in writing within 60 days
after the first bill containing the error was mailed to you. In your letter, include: your
name; account number; the type, date and amount of the error; and the reason why you
believe the bill contains an error. In return, the card issuer must investigate the
problem and either correct the error or explain to you why the bill is correct. This must
occur within two billing cycles and not later than 90 days after the issuer receives your
letter. You do not have to pay the amount in question during the investigation.
- Loss or theft. If you lose your credit or charge cards, or if you realize
they’ve been lost or stolen, immediately call the issuer(s). By law, once you report
the loss or theft, you have no further responsibility for unauthorized charges. In any
event, your maximum liability under federal law is $50 per card.
For More Information
The Federal Trade Commission (FTC)
works for the consumer -- providing the information needed to spot and avoid fraud and
deception in the marketplace. Access the more than 150 consumer publications offered by
the FTC online at http://www.ftc.org. Or
get a free copy of Best Sellers, a list of FTC publications, by calling
1-877-FTC-HELP, or by writing to Consumer Response Center, Federal Trade Commission, 600
Pennsylvania Avenue, NW, Washington, DC 20580.
The Consumer Information Center
publishes the Consumer Information Catalog which lists more than 200 booklets on a wide
variety of subjects, including credit. Access the Catalog and its full-text entries at http://www.pueblo.gsa.gov. Or write:
Catalog, Consumer Information Center, Pueblo, CO 81009. Or call them at 719-948-4000.
American Express Company offers free consumer booklets on a variety of credit subjects.
To order, contact: American Express, P.O. Box 4635, Trenton, NJ 08650-4635. For more
information about students and credit, visit http://www.americanexpress.com/student.
American Express Educational Loans helps students and parents secure the financing they
need to pay for a college education. Educational Finance Specialists are available 7 days
a week, from 9:00 a.m. to 11:00 p.m. Eastern Time, to explain your financial aid options
and walk you through every step of the process. For information on your college financing
options, call 1-888-756-4643. Or visit http://www.americanexpress.com/edloans.
Published by American Express Company in cooperation with the Consumer Information
Center. Information was prepared with the assistance of the Federal Trade Commission.
Copies may be reproduced for non-profit educational purposes.
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