Credit Cards


Friend & Foe

Credit cards have become as much of a part of our daily lives as breathing. The days of writing a check to make a purchase are almost gone. Credit cards are everywhere and people use them for everything. Every day we receive inquiries about Credit Cards. Credit, Debit, Secured, Pre-Paid, Store Cards. Everyone wants to know which work best for credit rebuilding. We also get a lot of questions about usage, balances, paying off accounts , etc.. So here is a collection of topics that we think will answer a lot of your questions. Hopefully you find the information useful. Remember, if you ever have any questions...we're only a phone call away

I guess the first place to start is just to give you some quick ideas of the different types of cards. All credit cards fall into one of two categories... Debit or Credit. Now , each category has a couple different variations. Don't panic...we're going to break it down real simple
Credit Cards: A credit card is a card where the issuing bank is actually extending you money or credit. The purchases you make are done with their money and at the end of the month you either pay them back in full by paying the entire balance or pay a portion of the balance in the form of a pre-set monthly payment. Now if you pay the entire balance owed at the end of the month you get charged no interest. If however, you pay the "monthly payment" you get charged interest and/or fees on the balance because you are in essence borrowing or using their money to fund your purchases. The percentage rate of interest you pay or APR can range from 2% to 25% depending on your credit score. People with good credit scores get charged low interest because the bank perceives the risk as being low. People with low credit scores pay much higher interest because the bank perceives the risk to be higher. Credit cards with " perks " or " rewards " are generally reserved for those with median or higher credit scores. There are also major banks like Capital One that offer "re builder" cards. These are cards are for those with lower than average credit scores but yet still fit into the bottom end of the banks acceptance envelope. These cards are a regular credit card but with lower credit limits and higher interest rates on any balances carried over from month to month. As you pay your bill on time each month for several months the bank will raise your credit limit on the card and eventually upgrade you to a standard card.

Secured cards fall into this general credit card category also. Secured cards are an opportunity for those with damaged credit that would not normally qualify for a credit card to get one. You are required to place a sum of money into a savings account with the bank. The bank then offers you a credit card with a credit limit equal to or slightly higher than the amount of money you have posted with them. The interest rate is high on any balances carried over from month to month. As you pay your bill on time each month for several months the bank may increase your credit limit. These are a good way for people with damaged credit to start the credit re building process. Because they are a true credit card they do report your payment history to the credit bureaus each month.

Debit Cards: A debit card may look like a credit card and you may use it like a credit card but it is a very different animal. A debit card is a card that draws it's funding from your existing money like your checking or savings account. The bank never extends you any credit. It's always your money you're spending. There is no monthly bill. There is no ability to " carry over " a charge from one month to the next. If you make a charge on your debit card it comes out of your account right then. If there is insufficient money in your account to cover the charge the charge is declined. Debit cards are really meant to be nothing more than electronic replacements for checks. Since the bank never extends you any credit and there is no monthly bill for you to pay on time they do not report to the credit bureaus. Debit cards are of no value in either building or re building your credit. They are nothing more than a pretty, convenient, point of sale, reusable check.

Pre paid debit cards are a slight variation on this same idea . The difference is that the pre paid debit is not tied to your local bank account. You are required to " fund " or pay money into an on line account that the pre paid card is tied to. Everything else is basically the same. You can only " charge " up to the amount that you have funded or deposited into your on line account. This type of debit card is a little more costly to use because there is a fee every time you deposit or " post " money to your on line account. It's usually small but as we're talked about before small charges can add up quickly over time. This type of card has a place in two different scenarios. The first would be for someone who has damaged their relationship with a bank and is now unable to open a conventional checking account. The second would be for someone that is very concerned with security when doing on line shopping. Using a prepaid debit card does limit your exposure to fraud since there is no direct link between your actual bank account and the debit card.

Now that we've covered credit and debit card basics let's talk using them smartly to help in the rebuilding of our credit !

When it comes to FICO remember that the purpose of your score is to show your credit worthiness or risk. Your credit card usage is a important source of information to FICO so use them smartly. Everything that you do with your credit cards is reported to the credit bureaus each cycle and FICO takes all that data into account when they assign you your credit score. The usage history of your credit cards is like an open line of information into your financial life and well being. There are four things that you can do with your credit cards that are virtually guaranteed to kill your credit score : Run up the balances on your cards. Pay your bill late. Not pay your bill at all. Open several new accounts in a 90 day period. Do all four of those things and your credit profile is in serious trouble because it shows FICO that you are in an unstable situation when it comes to your finances and thus a poor credit risk. Now, the good news is that the inverse of that is also true. Pay your credit card bills on time. Keep the balances on your cards to 30% or less of the available credit. Do not apply for or accept offers to open new credit card accounts unless you really need that card for some reason. Do all of those every month and it paints a picture of financial stability and responsibility to the credit bureaus. FICO will pick up this data and will reward you with higher scores in those categories. Remember your payment history and your credit card usage make up a tremendous 65% of your credit score !

Pay attention to all your credit card accounts but especially older accounts. The older an account is the more " established " it is. Older established accounts carry more weight with FICO than newer accounts do. Also major accounts ( Visa, MC, Disc, AMX ) carry more weight than store accounts.

Here are just a few general thoughts on credit card usage. Use caution and think about your purchases before you put them on your credit card. Using your credit card is kind of like using " invisible money ". We tend not to see the money being spent until the bill comes in. Then sometimes it's " Holly cow I spent how much ??? ". Credit cards can make it easy to over extend our spending and out strip our incomes ability to finance the payments. As a general rule credit card interest rates are high. Unless your credit profile is high enough that you qualify for one of the "premium" cards out there today you'll find that interest on balances carried over from one billing cycle or month to the next runs between 12 and 24%. That can be a staggering amount especially if you have to carry that balance over several months. So think about that when you make an impulse purchase planning on paying it off over a few months. That extra interest really adds up quickly to the price of the item purchased. Sometimes that " super sale deal " isn't a deal at all after the credit card interest is added back into the purchase price. And remember everything you do with your credit cards is reported to the credit bureaus and FICO sees it. So do something smart for your life and your credit score....use your credit cards cautiously.