Archive for the ‘Credit Tips’ Category

Like most offers that sound too good to be true, be careful about credit card balance-transfer offers. You might end up paying a bunch of money in fees or even lower your credit score.

Millions of these pre-approved credit card offers are mailed out every month. Often they offer 0% interest on all transferred balances for a time period. These balance-transfer offers allow you to use available credit from one card to pay off balances due on one or more other credit cards. Usually the special low rates expire after a certain time period. Moving balances that are being charged a high interest rate to a credit card with a much lower rate seems to make perfect sense.

Credit Balance Transfers and Credit Score

But transferring can reduce your credit score, which could cost you far more in other ways than it will save you on interest charges. Your credit score could drop because:

• If you a close a long-standing account (the one you transfer from), especially if it has been in good standing for over two years, your score will fall drastically.
• When opening the new card, or even just transferring the balance to an existing card, a credit inquiry will likely occur, dropping your score around five points.
• Adding another new credit account may lower your credit score because of your increased debt exposure (it may help in the long term, however).

Another issue to be concerned about is hidden fees. Depending on your past history and credit score, most balance-transfer deals require you to pay a fee. This could be a flat rate or a percentage of the amount borrowed. You also need to understand what happens to your rate when the limited-time offer expires and you still carry a balance. You might find yourself with a very high interest rate again.

If you pay close attention to the fine print and pay off the balance transfer amount during the promotional interest rate period, you can have a good experience and cut your monthly expenses by reducing your interest payments. And remember to keep your old credit card account open, or your credit score may drop big-time.

Do you have “clean” credit but wonder if your credit score could be higher? Should you take out loans to help your credit score, and if so, how many?

You’ve probably heard how important it is to build a strong credit history. Unfortunately, there’s no way to get a “good” credit score just by paying cash. You need long-standing, satisfactory credit accounts on your credit report in order to have a hope of improving your credit score.

Why are your credit history and score so important? Your personal credit history is a measure of your financial trustworthiness. Good credit means it’ll be easier for you to get loans, credit cards, home mortgages and low interest rates. And low interest rates usually results in lower monthly payments — saving you lots of cash. So, clearly, having solid credit is a big deal, and having poor credit can be a costly problem.

Most banks and other credit grantors use a credit score to predict whether you’re likely to repay a loan and make timely payments. This means they take your credit application and pull your credit report to learn things about you, like your annual income, overall debt, payment history, and the number and types of credit accounts.

Many people just have a chicken-or-egg problem: They have little or no credit history, but it’s difficult to get credit in order to build that history! Establishing a good credit history usually isn’t as difficult as it seems. Consider these options:

• Apply for a store or gas credit cards, since these retailers are usually more willing to issue credit to someone with no history. If you pay these bills on time, then major credit card companies will probably issue you a card down the road.
• Look for “secured” credit cards. Essentially, secured cards require you to put up cash that you borrow again. These are pretty easy to get, if you have the money, and will help you build a positive credit account.
• Find a co-signer. You can ask other people who have an established credit history to co-sign on an account. By co-signing, though, the other person agrees to pay back the loan if you fail to.

How many loans or credit cards should you take out to help your credit score? That’s a question that depends on a lot of factors, but most people should avoid opening more than a few accounts in a short period (within six months). Over time, you will want three or more long-term credit accounts in good standing on your credit report in order to have a chance at a good score.

Once you start to build your credit history, be patient, as it will take many months, even years, to get into the better credit brackets. Make sure you pay your bills on time, and don’t open too many accounts at once.

You just might be able to get a lower interest rate on your credit card by — believe it or not — calling and asking for it! Especially if you’re a loyal customer or have good credit.

It sounds too easy, but think about it: The interest rate on your credit card is, essentially, just an agreement between you and the issuer. That means it’s open to negotiation. So although the issuer has no legal obligation to lower it, you have no legal obligation to remain a customer either!

If you have a good credit score or your score has improved since you opened the account, you have a great shot at a lower annual percentage rate (APR). Long-standing customers and those who haven’t had recent unpaid bills (at least six months of on-time payments) also have a better chance.

Another point to consider: Your credit card company can borrow money at the federal fund rate, which is usually in low-single-digit percentage points. However, cardholders like you are borrowing from the issuer (if you carry a balance) at far higher rates — 16%, 18%, sometimes well over 20%. So there’s probably room for a compromise.

Also working in your favor is that there’s plenty of competition in the credit card market. The cost to acquire a new customer may be as high as $100 or $200, so it makes sense to keep a card customer in the fold.

The bottom line is your request for a lower APR has a pretty good chance of being accepted. And don’t be afraid to ask for a very steep drop. Depending on your current rate, start negotiations at a 5% or even 10% reduction.

What should you say when you call? I recommend you be polite and non-threatening, but firm. “Hi, I’ve been a customer for a while, I pay my bills and have good credit. I’ve gotten many offers from other credit card companies with lower interest rates. So I want a lower APR on my card with you, or I may consider switching. Can you help?”

If you pay off your balances every month, then you may think you don’t need a lower interest rate. That’s a fair point, but what happens if, just by accident, your monthly payment is received late? Then you’d pay a higher late fee than you would otherwise.

If you do order your credit score, make sure you get your three FICO scores. And if you do switch to a lower rate, don’t close a long-standing credit card account — your credit score will drop substantially.

You may have heard that credit card companies will “ding” your credit report if you pay off your balances, harming your credit rating. This is simply untrue. One of the best ways to improve your credit score over time is to keep your credit card balances low (this goes for other “revolving” credit accounts too).

What is Credit Utilization Ratio?

The reason for this is that 30% of your FICO credit score is calculated using the “amounts owed.” This makes it the second most important criteria after payment history. So keeping low balances helps because the credit score formulas use a “credit utilization ratio,” which is the current unpaid balance on your accounts divided by the credit limits on those accounts. In other words, credit utilization is simply how much of your credit limit you’re using. The higher your credit utilization, the lower your credit score. The opposite is also true — reducing your credit utilization ratio will eventually increase your credit score (everything else being equal).

Obviously, there are two ways to reduce your credit utilization: by paying off your balances or by increasing your credit limit (if you can do both, you’re even better off). Don’t be fooled into thinking that closing accounts will help; canceling established credit cards that are in good standing will hurt your credit score because it will decrease your overall credit limit.

Another very good — and obvious — reason to pay off your balances is that it’s the best way to live within your means and avoid paying high interest rates on balances that just eat up more of your hard-earned cash.

So, the lesson here is to pay off your credit card balances every month. It should help your credit score and keep more money in your pocket. And higher credit scores should result in lower interest rates for credit.