Need tips on credit cards

[roomwithamoose]

Alright, I'm 21 and have decided that I need to start building my credit. As soon as I had turned 18, I got a credit card and maxed it out. Fortunately, it never affected my credit report (well, not dramaticly) since I settled with the company. That taught me a huge lesson: that I'm a compulsive spender. Well, I was a compulsive spender, and I have gotten a lot better since then and I am much more responsibile, mainly because I have to be. Anyway, I want to get a credit card so that I can start building good credit for the future. I know now to look for a low APR, but I need to know what else. Are there rates that the company can change, and how do I know them? What companies are good? Who have you all had bad experiences with? I was thinking about seeing if my bank offered lines of credit, is this a good idea?

[HAL9000]

Build credit in a productive way... I'm sure things are probably similar in the US... here in Canada, credit can be established by contributing into a RRSP (Registered Retirement Savings Plan)... it's win/win... you build credit and save money instead of spending.

[PMich]

I watched this on Frontline a couple of weeks ago. If you really want to know what's going on and what to look for check this site:
Secret History of the Credit Card

[Jester]

if you do get a credit card don't dont hold a balance. Meaning buy something, put the money aside for it, then pay it off that month. Do that for about 6 to 8 months and then ask for a credit limit. Get about a 2500 dolar credit limit but never buy more than what you can put aside for a month on the card. Then get another card. Do the same thing. Once you have two cards that have 2500 limits put them in a bowl fill the bowl and freez it with water that way you have to wait 24 hours before makeing a purchase. Once you have those cards go out and buy a car. 5 year loan something you can afford and will be paid on time every month no matter what. you do those things and dont max the cards or get late on a car payment and you will be solid. I actually learned that credit agencys look at the number and limit of your credit cards. they reconmend two with a pretty high limit. Keep builing the limits up on the card but never leave a balance on it longer than a billing cycle. Carrying balances will kill you. Also look for cards with 18% apr. Do not get any cards that have .06 daily apr rates they will muder you.

[HAL9000]

I dunno about in the US.. but here in Canada, too much credit can actually hurt you in getting a mortgage. For example, if you have $10K in credit, even though there is nothing on the cards, they look at it as a potential debt... if you run it up to the limit, you have to be able to make that minimum payment along with your mortgage payment.

[roomwithamoose]

Well, I know I'm starting slow, I'll only worry about one card for now. I don't intend to carry much of a balance, but I will use the card to make reasonable purchases that I've already saved up for. I basically want credit for situations where I need to pay for something but don't have enough money on hand. I'd like to live my life with the least amount of debt possible. I don't like the idea of people taking my stuff away from me if the poo hits the fan. But if I have to pay for a new transmission or have my plumbing redone, I'd like to be able to do that.

Radioactiveninja, I like the idea about putting the cards in water and freezing them! Talk about stopping your compulsive spending! What I did with my bank accounts is I keep most of my money in my savings, but I don't have access to the savings through the internet or the ATM, so I HAVE to go into the bank for larger sums of money. Usually by the time I get to the bank I don't really want that new LCD monitor, it's a great deterent.

[mbossman2]

ok, (and this is from a former collections manager, current credit counselor and former credit counseling service client), 1st things 1st:

(BTW, this is a long post so get a cup of coffee and get comfortable)

revolving types of debt are BAD things...unless you pay off your balance in full each and every month you are NOT paying the amount on the price tag. you are paying anywhere from 1% to 100% more than that (depending on how long you keep the balance)...keeping that in mind:

0) make sure that you have money in the bank (savings) of no less than the credit line you want to have - - $500 line on the credit card = $500 in the bank...fool proof way of never getting in trouble.

1) start out small: credit cards for a specific store (sears, penneys, etc) are good way to start. They have a finite number of ways of using it and they will start you out with a small(er) credit limit, so your ability to get yourself into a deep hole are fairly limited.

2) do not allow a creditor to give you a big credit line (only you can determine what is too big, but $500 - $750 is a good starting point). They give you a big line because they know that the average debtor will use (and carry) a balance of 50-65% of the line and that will give them an excellent interest revenue stream (good for them, bad for you). If a creditor issues you a line of more than you want, call them and have it decreased to the level you want.

3) never cash advance off a credit card. not only does this lead to "robbing peter to pay paul" syndrome, it also costs you a ton of money (usually there is a fee for a cash advance, there also is a higher interest rate for c/a's and the interest accrues from the date of advance - - there is not grace period). so when they send you a PIN number, rip it up, burn it and scatter the ashes.

4) did i mention pay off the balance each and every month? if you can't pay it off at the end of the month, put the card away until you pay off the balance and if that takes more than 3 months then you need to seriously examine your credit usage.

ok, we continue:

your 1st card will not have the rates that you see on the capital one (or other) commercials, those rates are usually reserved for customers with great to outstanding credit, the rest of the world gets to muddle by on prime + 6 to 17% depending on your credit worthiness.

So other than rate, what else should you look for?

Fees - find a card that has NO annual fee (why pay for the priviledge of using their card?). Also look at late fees, overline fees etc.

How interest is calculated? - it used to be that your interest was calculated on a a 30 day (or less) average balance, nowadays, banks have gotten slippery: some use a 60 or 90 day average balance (good for them, bad for you)

"Grace" period - some banks give you 30 days and then interest kicks in, most banks now have shortened that window to 20 days. which messes up how you budget - - bills come more often (you will get 15 or so bills per year as opposed to 12) so you have to factor that in when doing you budget. (good for them, bad for you)

Things that look good but are really bad

"free" stuff - points for using the card that can be used for airline tix and other purchases. These are all enticements for you to use your card and very rarely do they offset the usuage of the card (unless you pay off the balance each and every month)

cash rebates - lets see...the bank gives you 1% back and charges you 14%...hmmm....spend $14 to get $1? not a good deal...

How to use credit cards

Use them to hold reservations (rental cars, hotel rooms, airline tix etc) and then pay in cash when you actually use the purchased item.

Use them for significant purchases - credit cards give you good leverage in case there is a problem with the goods or services. if what you bought is different than what is delivered you are in a stronger position than if you paid via cash (or by debit cards - - but that is another thread)

Do not use credit cards for day to day smaller expenses: that means no food purchases, no movie tickets, no gas, no other living expenses etc.

Do not use credit cards to pay other bills: no utility bills, no cable bills, no other credit card bills - - all you are doing is shifting your debt from one creditor to another and you will not get even, much less ahead.

Pay the bill, in full, each month....on time (or early), everytime...if you are going to be late, include the late fee...banks apply your payments in this order: late and other fees 1st, interest 2nd, principle last (again good for them, bad for you).

Treat your credit cards as if they were linked to your checking account - - charge something, deduct it from your checking account - - if and when you hit zero available funds - - stop spending and when the bill comes - - pay it in full....

If you find yourself in trouble, don't panic, keeping paying the bill and MOST IMPORTANTLY: STOP USING THE CARD(s). the best advice I have ever heard is to take the card, put it in a gallon sized zip lock bag, fill it with water and then stuff it in the freezer. By the time you unfreeze the bag and can get the card, your urge to spend will pass.

Credit rating, what is it and why is it important?

Your credit score is a mathematical model that takes into account:
Payment history - on time = good, not on time = bad.
Amount of used credit - of your available credit options, how much have you used/have an outstanding balance. in this case more is not a good thing.
How much credit do you have available to you (used or not) - having too many credit cards, even if you pay 100% on time, can be weighed against you.
How long you have been at your current job/residence - longer is better as it shows stability
and there is more but these are the biggies...

Your credit rating is more than just how do you pay your bill and can affect far more than your ability to borrow money. Today, credit scores (the short version of your credit history) are taken in account for:

Borrowing - how much can you borrow and at what rate
Insurance - car, house, motorcycle, life, boat insurance rates all take into account your credit score when deciding on your rates - - good score = good rates, bad score = bad rates or no coverage.
Employment - many employers look at credit scores as part of their background check on prospective employees. People who can't/won't pay their bills on time may not do as well on the job as people who do.

and the list is growing every day.

all in all, credit is a powerful tool and convenience, but if misused and not reated with respect, it can have long term ramifications on your financial capabilities.

According to the Fair Credit Reporting Act (FCRA - the law that governs credit reporting), negative information can (and does) generally remain on your credit report for up to 7 years (there are somethings, like bankruptcy and judgements, that can stay around longer and can turn up for up to 20 years if someone does a deep check...like mortgage companies and business loans), so big mistake now can follow you for a long long time...

if reading this hasn't bored you and you want to read more, here are some links:

http://www.youngmoney.com/credit_deb...sics/020908_01

http://clarkhoward.com/library/tips/credit_cards.html

http://clarkhoward.com/library/tips/..._problems.html

http://www.daveramsey.com/ ( i like him - - he believes in 0 debt - - btw, if you buy something from him, he DOES NOT accept credit cards - - nothing like practicing what he preaches see here)

http://www.ehow.com/how_2396_break-credit-card.html

http://www.ehow.com/how_1135_debt.html

http://www.ehow.com/how_117172_fix-credit.html

[doctorgonzo]

mbossman2, that's a fantastic post. I think the most important thing for you to do is to pay off your balance in full each month. Always, always pay it off, and if you don't have the money to do so, don't buy anything using your card. If you do this, you will win.

I do use my credit cards for a lot of things that mbossman2 said was bad, like utility bills, and day-to-day things like groceries and gas, but that's only because I pay off my bills in full each month. Since I do that, I never ever pay any interest charges (I've paid about a buck in interest in the eight years or so I have had credit cards), and I do get the bonus cash back. I have even bought a $5,000 car on my credit card, but I only did that because I had the cash ready to pay off that balance at the end of the month. If you can't pay your balance off every month 100% of the time, don't even start to pay for day-to-day things like this. Otherwise, you will literally be paying for that pizza or that tank of gas for years.

One thing that people have suggested is to put your credit card in a bag, then put it in a block of ice in the freezer. That way, if you get the urge to buy something with your card, you have to wait for it to thaw out, and that gives you time to reflect on whether you really need it or now.

HAL is right: if you have too much credit, that can affect your ability to get a mortgage. Having a lot of unused credit lying around is a good recipe to become overextended very quickly.

Credit cards can be powerful, convenient tools if used correctly. You can get fraud, theft, and damage protecting automatically by using certain credit cards. Bonuses can be free money if you do it right (I have received hundreds of dollars in cash back from Discover, and I have not paid them one dime ever in interest...I wonder why they let me keep my card!). The key is to never use it without having the cash available to pay it off immediately.

[rjfvillarosa]

mboss great post, gonzo good post, I whole heartedly agree with what you have both said and I behave with my credit cards in the way you have both described in your post's. A little over twenty five years now and still not a penny in interest, it's hard enough to earn it, why give it to someone else.

Great thread, Excellent post's. you all make me proud of you.

[DUSTIN]

do school loans show up on the credit report?

[HAL9000]

Oh.. and take it from somebody who has been bankrupt... I've seen on so many shows that they tell you if you are in a position that you are unable to pay your debts... call your credit card company right away to work something out... WRONG... the only thing they work out is covering their own behinds by starting with collections and court if necessary. We almost had one nail us, went bankrupt Aug 3rd 1997... that evening, my wife was served her papers to go to court against MasterCard... we beat them by literally a few hours.

Bankruptcy really wasn't that bad... but it's not something you want to do twice either. While I have credit again and have obtained my mortgage last year... it doesn't come that easy. We had to "buy back" our credit. One way being buying the car at VERY high intrest rates. It was originally a 5 year lease and we figured that we could get a loan 2 or three years down the line to reduce the rates. Problem is that we only have 22 payments to go and getting loan will only drop our payment by about $40-$50, but bump us back up to 36 months... I would rather just bear out the remainder of the lease and buyout at the end of the lease which will take about 6 months to pay.

It's cost us an arm and a leg, but a recent credit check shows us in VERY good standing.

[roomwithamoose]

Wow you guys!! Thank you very much! That is some awsome info here. I think I'm ready to start looking at credit cards. I think the two most important things I will remember is to pay off the balance in full, and also to just not carry it around with me. I'll purchase stuff with the card on a monthly basis, but I will have the amount saved up to pay it off immediately. And if it's not in my wallet, then I can't be compulsive.

Now what companies do you recommend? Visa, Mastercard, Discover, AMEX? How should I go about applying? Is it something I can do on the internet, or do I have to mak phone calls? I think I may apply for a Home Depot card, but I'd like to be able to put anything on a card that I have to, so I may not do that.

[doctorgonzo]

Originally Posted by DUSTIN do school loans show up on the credit report?

Yes, they do. All your loans and revolving lines of credit show up on your credit report. Probably not loans from your parents, though.

Originally Posted by roomwithamoose Now what companies do you recommend? Visa, Mastercard, Discover, AMEX? How should I go about applying? Is it something I can do on the internet, or do I have to mak phone calls? I think I may apply for a Home Depot card, but I'd like to be able to put anything on a card that I have to, so I may not do that.

There are thousands and thousands of credit cards out there. It is so hard to recommend one. You may want to check with your bank to see if they have one. Otherwise, you can seach on the 'net and generally apply online. No matter what, get a card with no annual fee. Get a card with as long a grace period as possible too. If you pay your balance off in full each month, interest rates don't matter as much, so you can look at the kinds of bonuses you want to decide between different cards.

[mbossman2]

Visa is accepted just about everywhere, but their customer service is truly dependant upon which bank is the issuer.

MasterCard is the same way

Amex is not as widely accepted as Visa and MC, but their customer service is second to none. Do be aware, Amex has 2 types of cards - their green card is a true charge card - you must pay it off at the end of the month, in full. their blue card is a credit card and allows you to carry a balance.

Discover - don't have one so I can't really comment.

As for applying: don't you get 1000's of solicitations every day? if not, then try here: http://www.bankrate.com/brm/rate/cc_home.asp?link=5
or the next time you go to a sporting event there'll be an MBNA booth set up...hit them up. Once you have a card and establish a decent credit score, you will get more than enuf solicitations.

as to bankruptcy, I disagree with a HAL slightly. While an individual has very little leverage with banks, there are non-profit agnecies that can be your advocate with the banks. They act as an independent 3rd party and can mediate between debtors and banks...however, there are times where even they can not help and will counsel BK (I know, I have looked over clients bills and come to the conclusion that there is no other way out). The new BK laws have made wiping the slate clean a bit more difficult than it was in the past, you now have to pass certain "tests" to qualify for CH7, the big push is to get most under the CH13.

[Cricket]

Basic rule of thumb that I was taught to keep from getting into financial trouble with credit cards: If you can pay cash for an item, do so.

If you only have your credit card with you, only buy the item if you have sufficient funds to cover the cost of the item on your next credit card bill.

Don't keep a balance on your credit card if at all possible.

So basically get a credit card to build up your credit but pay for everything with cash...makes a lot of sense, huh.

Cricket

[HAL9000]

Originally Posted by mbossman2 as to bankruptcy, I disagree with a HAL slightly. While an individual has very little leverage with banks, there are non-profit agnecies that can be your advocate with the banks. They act as an independent 3rd party and can mediate between debtors and banks...however, there are times where even they can not help and will counsel BK (I know, I have looked over clients bills and come to the conclusion that there is no other way out). The new BK laws have made wiping the slate clean a bit more difficult than it was in the past, you now have to pass certain "tests" to qualify for CH7, the big push is to get most under the CH13.

Well.. we were in a no way out situation... $600 a month income... $102,000 in credit cards and student loans... my wife's student loan demanding $960 per month... not exactly rocket surgery to know that no amount of mediating was gonna get us outta that one.

[Panama Red]

My compliments, gentlemen. Some of the best personal financial magagment advice I've seen/heard in a long time. It took me years of debt and headache to reach where I'm at today, paying everything on time and in full each month. Couple of areas where I tend to deviate from mbossmans' advice. I use one credit card for all purchases including groceries, utility bills, etc. I have 4 savings accounts. One is used exclusively to hold funds to pay the credit card balance. As we charge things, money is transferred to this account to cover the expense. Then when the bill comes the money is already available and I just write a check. My Visa pays me an annual bonus based on the volume of business I use if for. Every year in Aug we get a check for about $150.

The one lesson I have tried to teach both of my kids is NOT how to SPEND money, but how to SAVE it! There's a great book called, "The Richest Man in Babylon", in which the author emphasizes one key point over and over - Pay yourself first. Every time you get a pay check or a bonus or any form of income, take 10% of that amount and put it in a secure savings account. Then don't touch it. Let it grow even tho the growth is slow. When there's enough to invest in a Certificate of Deposit (the other CD!), buy one to lock in a higher rate for 6 months to 1 year. When the CD matures, roll it into another and never touch the interest income. It's amazing how much money you can accumulate this way over a working lifetime. When it's time to retire, you'll have a huge amount of money. And remember, retirement isn't about reaching a particular age, it's about reaching a point of financial security where you don't HAVE TO work if you choose not to.

[mbossman2]

i should point out that my advice is for those who are just embarking on their credit life, it is imperative that you develop good habits 1st, then and only then can you begin to work the system to you advantage.

there are advanced strategies to leveraging credit cards and their offers for your benefit, but for the unwary they can be a dangerous game to play if you do not have the good credit habits ingrained into your being.

I have been on several trips, have several toys and have given multiple gifts thru the wonderful Amex rewards program...all without having to pay a dime in interest...

as to investing: start early, contribute steadily and let the wonderful power of compounding interest work in your favor. see here

[nin137]

I have a question about building credit. I heard that simply paying rent (i.e. getting into a 12 month contract for an apartment) and then paying it every month shows you can maintain good credit. although i would doubt that since technically there really isn't ever any credit to be had in the first place. does anyone know about this?

[mbossman2]

Originally Posted by nin137 I have a question about building credit. I heard that simply paying rent (i.e. getting into a 12 month contract for an apartment) and then paying it every month shows you can maintain good credit. although i would doubt that since technically there really isn't ever any credit to be had in the first place. does anyone know about this?

in the traditional sense of building up a credit file at a credit bureau, no. Credit reports are created based on information received from lending institutions and other credit firms (collection agencies and the like) who subscribe to their service. Unless your landlord reports your account to a bureau then it will not show up on a TRW or Experian type report.

you can however, list your landlord as a credit reference and if the lender wishes to contact them they may and early on, when a prospective borrower has no office credit file, it may tip the balance in your favor.

In addition, while there is no money being repaid, you are showing thru steady and timely payments that you have sufficient control over your financial life that you may be a good risk to lend $$ to.

[mbossman2]

Originally Posted by HAL9000 Well.. we were in a no way out situation... $600 a month income... $102,000 in credit cards and student loans... my wife's student loan demanding $960 per month... not exactly rocket surgery to know that no amount of mediating was gonna get us outta that one.

no doubt....i'd've referred you to an attorney about 2 minutes into our meeting...

[roomwithamoose]

Alright, sounds good! The whole point of this is to start off with very good habits. Fortunately for me, I had maxed out a card and managed to pay it off with help from my grandfather. My dad never really taught me anything about money growing up, so I want to be off to a good start right now to prepare for the future. Thanks for all the advice, and let me know if there's anything else I should consider!!!

[HAL9000]

Originally Posted by mbossman2 i should point out that my advice is for those who are just embarking on their credit life, it is imperative that you develop good habits 1st, then and only then can you begin to work the system to you advantage.

EXACTLY... we made a mistake... we're both impulsive... and look where it had put us... ooops... learned a lot from that one.

[mbossman2]

Originally Posted by roomwithamoose My dad never really taught me anything about money growing up, so I want to be off to a good start right now to prepare for the future.

Don't feel bad, this is one area of the world that very few people get a good grounding in from either their parents or schools. It's kind of odd that it is overlooked by so many as it is such an important topic.

Money, savings and investing can be viewed as a game (a very serious one at that) and no one should play this or any other game unless they understand the rules that govern the game.

good luck

[doctorgonzo]

Originally Posted by mbossman2 Don't feel bad, this is one area of the world that very few people get a good grounding in from either their parents or schools. It's kind of odd that it is overlooked by so many as it is such an important topic.

That's very true, and also incredibly sad/dangerous. Basic money management should be a requirement in every high school, but almost no schools have classes like this. I think my school was above average in this regard, and all we did was spend a few days in another class learning how to balance a checkbook and fill out a simple tax form.

[mbossman2]

Originally Posted by doctorgonzo That's very true, and also incredibly sad/dangerous. Basic money management should be a requirement in every high school, but almost no schools have classes like this. I think my school was above average in this regard, and all we did was spend a few days in another class learning how to balance a checkbook and fill out a simple tax form.

my high school course did the same thing, taught by a priest who, before being ordained was an FBI forensic accountant specializing in Mob accounting...covered everything from basic household budgeting to balancing check books to income tax returns as well as how the stock market works and interest rates (both how they are set and how they are applied to accounts). probably one of the most useful courses I have ever taken.

the course was called practical economics.

[pam123]

mbossman's posts are great and it would be a good idea to catch the PBS show on credit that PMich posted the link to ( If nothing else a little fear will help you make wise credit choices, they really can do whatever they want to you. ).
I give you this warning as well.
A few months after you embark on your sane credit lifestyle you'll suddenly find your mail full of "pre-approved" credit offers.
Just sign your name and they'll send you a card.
Throw them out ( put'em through a shredder first ). You're being played for a fool.
If you follow mbossmans advice one general purpose card will be enough and maybe one or two specialty ones, like Sears, that's it.
Just look on people with a wallet full of credit cards as disasters waiting to happen.

[mbossman2]

Its been a slow day at the office, so let me give you a horror story for not paying your debts:

It starts with a simple little phone call - - "have you forgeotten to mail your payment?"

if you still haven't paid, the calls begin to increase in frequency and urgency to your home and work and then one day, when you need it most, your card just stops working (they turned it off which then triggers off the universal default clause in your credit contract - - your interest rate on this and possibly your other cards goes right thru the roof - as high as the mid to upper 20%'s).

Now, by this time, you stop answering the phone and screening your calls, so the bank then calls your neighbors and asks them, quite nicely to drop off their name and number and a message to call in as soon as possible...that can be quite embarrassing (and quite legal as long as the reason for the call - debt collection - is not disclosed). Letters come to your employer asking to verify that you are still working there.

You still decline to pay - - and the tone of the letters and the calls change and words like "default remedies" and "legal options" start to appear.

And then, one day, the calls STOP....and you think "hey, maybe they forgot about me" and then one day, maybe at home, maybe as you are leaving work, this guy comes up to you and says "Are you (insert your name here)" and you say "yes" and he hands you a piece of paper and says "you've been served". You are now in the legal system. You are getting SUED for non-payment.

You then have to go to court (or not) and plead your case. You will lose. The judge will then order payment and sign "judgement" papers. These will be filed with the county clerk (and anyone who looks will be able to find out that you have one - - as well as it appears on your credit report). (BTW, all this time, the interest keeps piling up and the money you owe keeps going up and up).

then one pay day comes and there is this deduction in your paycheck - - Wage garnishment (usually about 10% of your gross wages) and forwarded off to the bank...now your employer knows that you are a deadbeat.

Then the real fun starts: one day you go to the bank to take our some pizza money and there is nothing there - - the judgement has hit the bank and they have, by court order, drained your checking account...you have outstanding checks? ahh thats too bad....now checks start to bounce all over place...compounding your debt problems...

not only can your judgement holder execute against bank accounts, brokerage accounts etc, they can also attach any property (like cars, motorcycles etc) that you own and has no lien on...

and this continues (and repeats itself as you get behind on other bills) until you either file for bankruptcy or pay everything off...

[roomwithamoose]

See, that's just scary. I think it's sad that a system can do that to people. I mean, granted it is their fault for not being responsible, but I think that there should be rules in place so that it never even gets to that point. That is why one of my main goals in lif is this: when I am older (what I would consider and adult, since I still think I'm a kid!) the only payment I want to be making every month is mortgage. I figure that a house is probably the only thing I can't pay for in cash, especially here in Southern California. That would be nice.

[pam123]

It's not you wanting a house or a car. There's nothing wrong with that.
Acting like a fool is one thing but being set up by a group of folks, who know how to push all the right buttons, is another.
What we're telling you is how to avoid the rodent wheel scam that too many people get trapped on.
Understand this now, the credit thing is stacked against you, use it with caution.
It speaks volumes that banks consider the people who pay off their charges in full every month to be deadbeats.
Enough said!!!