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Do you know what’s on your Credit Report?

By Steve Diamond

Credit card offers, they’re everywhere! They appear in your mailbox. They pop up while you’re surfing the Internet. They’re in slick brochures next to the cash register or gas pump. They’re in full-page ads in the Sunday papers.

If you need a new credit card, how do you choose? You should evaluate each offer carefully, and to do that you must understand these essential terms.

Annual Percentage Rate (APR):
The interest rate charged on your account balance. (But see “Balance Calculation Methods,” because the rules for computing interest from your balance and your APR can vary.) Your statement will usually show the APR and a monthly and/or daily rate based on the APR that’s actually used to calculate your monthly interest. There may be several APRs applicable to different portions of your balance, for example an introductory rate, a regular purchase rate, and a regular cash advance rate.

A fixed APR is set by the credit card company, which can generally change it with as little as 15 days advance notice, especially if you run afoul of any of the “gotchas” in the terms. These “gotchas” are often very consumer-unfriendly. For example, many companies these days reserve the right to raise your rate if you’ve been late on a payment to another, unrelated company.

A variable APR is tied to some widely used economic index, such as the Prime Rate. It may be stated as “prime + x%, currently y%,” for example “prime + 7%, currently 13.5%.” This means that when the Prime Rate is 6.5%, your APR is 13.5%. When the Prime Rate goes up or down, so does your APR. But beware, because some of the same “gotchas” apply to variable APRs as to fixed APRs. Read the fine print. It may state that if you’re late with one payment, your APR will no longer be variable but will rise to an exorbitant fixed rate, usually over 20%.

The penalty APR is the rate to which your APR will immediately be raised when you violate any of the “gotchas” in the terms. This rate is usually at least 50% higher than the regular APR. Again, be sure to read the fine print to see what situations will trigger the penalty APR. You’ll often see these: failure to pay this or any other account on time, exceeding your credit limit on this or any other account, excessive credit balances on your accounts in aggregate.

Balance Calculation Methods:
These are important to understand, because your APR is only part of the story when it comes to calculating the interest you’ll be charged each month. The other part is how the balance is calculated to which the APR is applied. In any case the balance is multiplied by the daily or monthly interest rate. But the balance calculation is not as straightforward as you might think.

1. Two-Cycle Balance. This is the worst method from a consumer’s point of view because it can lead to the highest interest calculations. Unfortunately, it’s also becoming the most widely used method. To calculate the balance, add together the average daily balances for the current billing period (sometimes even including new charges) and the previous period. Here’s why this is so unfriendly to you. Say you have run a balance for a few months and finally pay it from $200 down to zero at the end of May. You think it’s safe to use the card in June for a new $100 purchase, and if you pay the $100 by the end of the June grace period, you won’t owe any interest on it. But you’re wrong. Since your average daily balance in May was not zero (say it was $120), and since you used the card in June, your interest will be calculated on May’s average balance again, so even if you pay the whole June purchase in June, you will still owe additional interest. In other words, you must wait two months, allow the account to cycle once with a zero balance, before it’s safe to use it again — “safe” in the sense that you won’t incur extra interest if you pay the balance in full by the end of the grace period.

2. Average Daily Balance. This was once the most common calculation method and is still popular. Add the daily balance for each day in the billing cycle, then divide by the number of days in the cycle. Depending on the terms, this may or may not include new charges.

3. Adjusted Balance. This is the best method from a consumer’s point of view, but it’s rapidly going the way of the dodo. Take the balance at the beginning of the billing cycle, then subtract any payments or other credits recorded during the cycle. Do not include new charges during the cycle. For example, if your beginning balance was $1200, and you paid $400 during the cycle, the balance to which your monthly rate will be applied is $800, regardless of any new charges.

Balance Transfer:
This means that you’re charging card X to pay off (all or part of) the balance on card Y. So the balance is, in effect, transferred from card Y to card X. Why would you want to do this? Usually to take advantage of an introductory low interest rate when applying for a new card. Look closely at the terms. Sometimes these introductory rates last only a few months. The best ones are for the life of the balance. You will often have to pay a transaction fee equal to 3% of the balance transferred. Sometimes these fees are capped at $75 or so. Be sure to see whether or not the transaction fee exceeds what you’ll save in interest. If so, don’t do it. Sometimes the credit card company will agree to waive the fee, especially on a new account. Don’t be afraid to ask.

Cash Advance:
A cash loan charged immediately to your credit card account. Usually there is no grace period for paying off a cash advance, which means you’ll be charged interest starting from the day of the loan, even if you pay it in full by the end of the billing cycle. Also this type of charge may have a higher APR than purchases or balance transfers. Check your terms. Note that some kinds of transactions, like buying casino chips or lottery tickets, may be treated as cash advances. This can also apply to writing a purchase check to your own bank account. Be sure to read the fine print.

Credit Limit:
The upper limit on your account balance. Exceeding it may result in penalties. Be very careful if your balance is close to the limit (“maxed out”), because you can exceed it without charging anything new if you fail to pay enough. Remember that just because the company has approved you for a certain limit doesn’t mean you can afford to take on that much debt.

Disclosure Chart:
An important portion of the Terms and Conditions statement. It’s a little bit like the Nutrition Statement on a food package because the law dictates what has to be listed here. If you can’t stand to read all the fine print, be sure that you read this part.

1. fixed APR or APRs after any introductory rate(s) have expired
2. rule(s) for calculating variable APR(s) if applicable
3. grace period
4. annual fee if applicable
5. minimum per-cycle finance charge
6. additional fees if applicable, such as cash advance fees
7. balance calculation method
8. late payment and delinquency fees
9. over limit fees

Grace Period:
The time, calculated from the account cycle date, during which you can pay the balance in full without having any interest charged. This usually applies only to purchases, and only if you’ve paid the previous month’s balance in full and on time. (Sometimes even that’s not enough. See “Two-Cycle Balance” calculation method for an additional “gotcha.”)

Pre-Approved:
This can be very misleading. It doesn’t mean the company is guaranteeing to issue you the card in the offer. It just means they chose you to receive this offer based on some general screening of your credit report. They always reserve the right to deny or alter the offer based on a more detailed examination of your records.

Banish these myths from the way you handle your credit! Your score will be as good as it can be when you know the truth about how these actions affect your credit score.

Damaging Myth Number One: Closing inactive accounts will raise your score.

This is a widely held belief, but it’s false. Closing accounts, whether or not they have zero balances, whether or not they’re inactive, will often lower your scores. Why? Because part of your credit score is based on the ratio of your credit card debt to your total available credit. If you close a zero-balance account with significant available credit, this ratio gets smaller. It’s as simple as that.

On the other hand, you can also have too much of a good thing (too much available credit compared to your ability to pay). If you’re concerned that this may be true in your case, then you can close zero-balance accounts that you don’t need. If you plan to close more than one zero-balance account, wait a few months in between. Each closing will initially affect your score adversely, and it can take months for the scores to be adjusted upward.


Damaging Myth Number Two: It doesn’t matter what balance is on each card; it’s the total that counts.

Again, this is untrue. Another part of your score is calculated by looking at the debt to available credit ratio on each card individually. Ideally, keep this under 30% on every one of your cards. For example, if your credit line on a card is $2500, keep the balance below $750.

Pay your debt down instead of moving it around to other revolving accounts. Moving it around (for instance, moving balances to zero or low interest credit cards) can lower your scores. With all the offers for low initial rates, many consumers are moving their credit card balances over and over again, trying to keep their accounts at the lower rates. If you’re moving balances among accounts that you already have open, and if you can do it without going over 30% on each account, then this is okay. But if it means applying for a new account each time, don’t do it. Each application will lower your score.

Damaging Myth Number Three: More accounts and greater available credit always means a higher score.

Not true. Don’t open new accounts you don’t need trying to increase your available credit. It can backfire. You need only four open and active accounts to establish great credit scores. Apply for credit only as you truly need it.

Many folks fall for department store promotions. The offer to get 10 or 20% off if you open an account may look like a great deal, but the activity can be detrimental to your credit scores. Don’t open accounts thinking it will raise your score, as it may not help at all. Have credit cards, but use them wisely. It is actually viewed that someone that has a good history of responsible credit use is a lower risk than someone with no credit cards at all. For the best score, ideally you should have a mix of installment credit (cars, furniture, etc) along with credit cards and mortgages.

Damaging Myth Number Four: Your credit reports are complete and accurate, even if you never make sure of it.

If you have ever had a collection account, judgment or tax lien, don’t assume that the creditor, collection agency or taxing body will report the resolution to all three bureaus. That goes for erroneous reporting you find on your report too. Don’t assume that because you paid off a collection, judgment, or lien that it is immediately reported to the bureaus. Even when you close an account, it is often not efficiently reported as such to all bureaus. It is not uncommon to see such activity reported to just one bureau, even when the adverse account was being reported on your credit report by two or all three bureaus.

Unfortunately, agencies and creditors are quick to report you when you owe them money or have made a recent mistake, but they can be very slow to report the final resolution to that account when you have paid them. This problem is magnified when there has been a bankruptcy. Accounts that have been involved in a bankruptcy may have been moved between the creditors and various collection agencies long before the filing for bankruptcy protection. The creditor is reporting the account as delinquent and is likely reported it as a charge-off.

But the creditor has also sold the account to a collection agency, hoping to get a small percentage of their loss back if the agency can collect anything. This goes for credit cards, department store accounts and even installment loans like auto loans. The account is sold back and forth between creditors and agencies.

The problem is that after one files for bankruptcy protection, and after the time has passed that it takes to successfully bankrupt the debts, the accounts may be sold multiple times. In addition, it is not uncommon to see an account go to collection after it has been discharged in a bankruptcy. You are thinking that you have a fresh start to rebuilding your credit after the bankruptcy, yet there may be new collection accounts dated after the discharge which has a huge impact on your already damaged credit scores.

What’s the remedy? Watch your credit reports like a hawk! No one else cares nearly as much as you do about making sure they’re accurate. You have to follow up with each individual bureau and supply them with copies of your discharge and lists of creditors to insure that everything is reflected accurately on your overall credit report. It can take years to see a rise in your credit scores if you don’t follow through with this. It is your responsibility to watch any such activity and make sure that all three bureaus have the most recent and accurate information possible. You can write and/or file online disputes with each individual bureau and supply copies of paid receipts and any correspondence you may have to insure that your record is recent and correct.

Resources

You have the right to one free copy of your credit report per year from each of the big three credit reporting agencies. They don’t have to be requested at the same time. For more information go to AnnualCreditReport.com.

These are the big three credit reporting agencies:

Experian
NCAC
PO Box 9556
Allen TX 75013
888-397-3742
http://www.experian.com/

TransUnion
Customer Disclosure Center
Trans Union Consumer Relations
PO Box 2000
Chester, PA 19022-2000
800-888-4213
http://www.transunion.com/

Equifax Information Services
P O BOX 740256
Atlanta, GA 30374
800-997-2493
http://www.equifax.com/

• Why did you use your credit cards? For many, spending money has nothing to do with needing the items that are purchased, but to have an outlet or even as a habit. If these are problems that you may have, dealing with them is necessary before finding a way to get a credit card debt solution.
• Do you trust yourself to not use your credit cards again? The method that you choose as a credit card debt solution needs to be one that you can succeed at. If you are not sure that you can trust yourself to not use the credit cards as you pay them off, cut them up.
• Are you willing to work for the rewards of having a debt free life? For some, working for the goal is motivation and the way to go. For others, taking their losses through filing bankruptcy and struggling for the next ten years is a better solution. Where do you fit in?

The credit card debts solution that you choose can only work if you are willing to make it work. For example, many people find themselves struggling without seeing a reward for a while before they get over the hump and start seeing positive things happen. If you cannot handle that struggle and wait, other options may be a better choice for your credit card debt solution instead. Determine which method is right for you in credit card debt solutions and then get started.

What You Need To Do Now

To make credit card debt elimination your goal, you need to find a way to stop using the cards, to pay them off and then to learn to use them wisely. To help you to reach the first two of these goals, here are some tips that you need.

• Realization. It is important to understand that when you make a purchase with a credit card, that each of those items is costing you more than what that receipt says. It will cost you more in interest, in late fees, in over the limit fees and over and over again. You need to realize that you are throwing money away when you use your credit cards unwisely.
• Stop Spending. Cut them up, freeze them, hide them in the bottom of a drawer. Whatever you do, you need to stop using your credit cards at least at this point. If you pay them off and then stop at a store, you are more likely to use them again and start the cycle over. Or, for some, making a $50 payment means that now they can spend another $50. You have to commit to stop spending.
• Pay them down with all that you can. It takes cutting corners to make sure that you can pay down the credit cards. It will cost you thousands of dollars in interest if you only pay the minimum payment every month. You need to pay as much as you can and as often as you can.

Credit card debt elimination can only happen when you make it your goal. The rewards are many and the road is hard. But credit card debt elimination is your goal.

Credit card debt can harm many aspects of your life. For starters, your credit history will show just what kind of debt you are in. Whether you plan to never use credit or not, though, your credit score is a key factor in your life. Not only does it play a role in allowing you to have credit cards, but in other situations as well.

• Your credit score can hurt you if you are applying for a home.
• Your credit score will hurt you if you apply to purchase a vehicle.
• Your credit score can cause car insurance rates to soar.
• Your credit score can limit the job that you qualify for as many employers get a credit history of the potential employees.

Getting credit card debt help is the only answer to saving that credit score. But, there are many ways that you can get that help. First, start out by realizing that you can work past your debt with credit card debt help but that it will likely take time. It took time to build up as well. Then, explore ways in which you can cut it down, consolidate it or even wipe the slate clean. For each person, the solution will be somewhat different but the facts
remain the same. If you do not get the credit card debt help that you need, then you will find yourself struggling in virtually every aspect of your life.

How It Happens

Credit card debt problems happen when individuals make the mistake of trusting that they will pay off their debt each month. There are mistakes made when things are purchased that are not needed, but even when things are necessary, purchasing them with credit can be the mistake. Those individuals that do not use credit cards must have cash on hand to make a purchase. That means that every purchase that they make must be carefully considered. Here are some pointers to help you determine if you really should use a credit card to make a purchase.

• For any expense that is not immediately necessary and over $200 (for example) install a 24 hour wait and see period. During this time, you must not purchase the item but will consider if it is the right choice to make. This stops rash decisions because something is on sale or a great deal.
• Put the credit cards aside and spend cash. When you do this, you will really see what is happening with your credit card debt problem. You will be forced to think about each item you purchase.
• Track your spending for just one week, but better yet a month. Track each dollar you spend in a notebook that you carry with you. This too will point out what happens with your debt.

Understanding that credit card debt problems can cause a great deal of trouble for you today and into the future is important. Next, you need to learn just what can happen if you let your credit card debt problem worsen. Then, how to fix it as well.

Do you have a manageable debt problem? Maybe a life event, like temporary job loss or sickness, may have put you a bit behind on your payments. Or maybe you just let your small debts add up to the point that you feel they may be getting out of control.

If this sounds familiar, then you need to take action now. Follow these four easy steps, and you’ll soon be back in control.

Step 1. Stop accumulating new debt!

This is the first and most important step. If you keep charging, you will dig yourself a deeper hole. If you can’t take this step, you may as well stop reading now. The rest of this article will not be helpful.

Step 2. Prioritize your payments.

Make a list of all your monthly obligations. Then arrange them in order of priority. Start with those that you can’t do without, like your mortgage payment and your utilities.

Next are the credit cards and store cards that charge the most interest. By paying off the cards with the most interest you can reduce the amount of interest calculated on your next bill. This means you will pay off your entire debt as quickly as possible.

If you can get a balance transfer offer to another card with a lower interest rate, and if there is no transfer fee, it may be worthwhile to transfer your credit card balance onto another card. If you can get an introductory 0% rate, great. This allows the full monthly payment to be deducted from your balance without incurring any interest. But most of these offers are for a limited time, like 6 or 9 months. After that, the rate may go up quite a bit. If you can’t pay off the whole balance before the rate changes, you may be better off not making the transfer.

Keep your list handy so you remember to make your debt payments with any available money you may have at the end of each week or month. Doing so prevents any arrears and a build-up of interest on credit cards and store cards. Resist the temptation to take the excess cash and splurge.

Step 3. Find ways to cut back on expenses.

You will be surprised at what you can save when you cut back. Make a list of all of your current expenses. This includes all your shopping, hobbies, magazines, newspapers, treats, everything. Then take a look at the list and remove all non-essentials. No cheating! A cup of Starbucks latte is not an essential expense. If you buy one each working day, you can save roughly $100.00 a month by stopping. (That’s $4.50 per latte times 22 working days in a month.) That’s quite a lot of money when you’re swimming in debt. Maybe it could make the difference between swimming and drowning.

Be tough-minded over this. After all, it’s to your own benefit. You may feel a little lack in the short term, but imagine your future prosperity and keep prosperity at the forefront of your thoughts. You will be surprised to see how much you can save from this technique and how little pain it will cause when you keep your ultimate goal in mind.

Step 4. Contact your creditors.

If you just can’t keep up with your payments, don’t be afraid to contact your creditors. They will try to help you. It costs them much more if you default than it does to work with you, so they have just as strong an incentive to work something out as you do. If you’re having trouble meeting your payments, tell them. Be realistic about what you can afford. You may be able to negotiate a new payment plan that you and your creditors can live with. It’s much better if you contact them first.

Before contacting your creditors, make a comprehensive list of your income and expenses. This lets you calculate a realistic amount that you can pay each month. After you have completed a list of expenses, make a list of all creditors, remembering to prioritize from most important to least important. Then prepare a formal letter to each creditor explaining your situation and proposing your payment plan.

When you and your creditor agree on a plan, be sure to stick to it and to keep in touch. This will earn you the trust of your creditors.

By following these four easy steps, you will once more be in control of your debts, and well on the way to being debt-free.

What you are about to read may make you reassess your attitude to zero interest balance transfer offers. I will show how these balance transfer offers are pushing more and more people into serious financial difficulties and I will suggest a few ideas on how you can manage your debt better.

Credit card debt is rising at an alarming rate and many people are now getting into serious financial difficulties. One of the reasons is the promotion of no interest balance transfer offers and interest free initial periods.

Like most people, I’ve been tempted by the these offers to change my credit cards. I’ve taken them up on their offer and moved my credit card debt and, for a limited time, had no interest to pay. But “just in case of an emergency” I usually hang onto my old card.

Then something happens, an unexpected bill, or a wedding or birthday gift I’ve forgotten about. “Never mind” I tell myself “I can put it on the old card – there’s plenty of credit on there so it’s no problem.”

A few months and a few unexpected bills later the interest free period runs out I have to pay interest on both my new card and the old card. Now I’m worse off than when I started but that’s no problem as I can look for another card offering another interest free period and zero interest balance transfers.

It’s so easy and the banks and credit card companies are so eager to lend the money that it becomes routine, until that is, something goes wrong. You could fall ill and be off work, or, you could lose some overtime and your wages fall, or maybe that big deal you were relying on falls through.

It may just be that the credit card companies decide you have too much outstanding on credit cards and you would have difficulty paying the repayments, or simply they spot that you are a regular churner of the debt and they don’t want your business.

Whatever the reason the result is that you have all the interest to pay and you start to struggle with the minimum payments and miss one or two. Because you’ve missed payments it becomes even more difficult to find the next interest free balance transfer offer.

Now you have a real problem but it is one that can be avoided.

I could suggest that you don’t use credit cards but I suspect that would not be acceptable, and I am not going to suggest you ignore the 0% offers – that would mean you paying interest when it is not needed.

The simplest way to benefit from these balance transfer offers, but keep your card debt under control, is to cut up your old card when you switch to a new one.

That way you benefit from the 0% offer but minimize your exposure to higher debt.

Once you have cut your card up though, it is essential that you contact the card issuer and close the account. Until you close the account the card issuer will continue to tempt you with special offers to use your old card.

Another tip is to never pay just the minimum payment. Always pay the maximum monthly payment you can afford. Reducing your payments simply pushes back the time when you have to repay and in the long term increases your payments. Use the interest free period to reduce your debt to the minimum and if possible clear the balance.

Credit card companies don’t offer an interest free balance transfer because they are feeling generous. They do it because, in the vast majority of cases, they will be able to charge you more in the longer term. Use interest free credit to benefit you not the credit card companies.

John writes articles on a number of topics including debt management and finance. For more information on how to manage your credit cards go to www.card-debt.net