We all hear a lot of advice about the best ways to manage our credit cards and keep our credit scores high. There are a lot of misunderstandings about credit cards floating around these days. Some of them have a grain of truth embedded somewhere inside; others are things that were true once upon a time but no longer apply today. The purpose of this workshop is to tell you the truth about credit cards today, and tell you what resources will help keep you correctly informed about consumer credit and credit cards in the future.
To help you understand how credit cards became part of the financial mainstream, you need to know a little about their history. Prior to 1978, the federal government regulated and controlled the terms and conditions for credit cards. The OCC, part of the Treasury Department, dictated the interest rates and fees that credit card issuers could charge. Creditors challenged this, and in 1978, the US Supreme Court agreed with the creditors. They said that since ccs were issued by banks across the country, then the state laws, not federal laws, should govern their terms and conditions. This decision led to 2 major changes: (1) cc issuers moved their operations to the states that had the most favorable laws for credit cards, mostly Delaware and South Dakota; and (2) it made it worthwhile for creditors to expand their base of cardholders. The great American credit card rush was born!The second wave of cc growth happened in the early 90s, and it was helped along by another Supreme Court decision, that allowed card issuers to offer terms and conditions based on the individual borrower, not on state standards. If you had a credit card before 1990, chances are that no matter how good or how bad your credit was, you probably paid an annual fee for the card, and had a interest rate somewhere between 14-19%. After 1991, card issuers enticed new customers by waiving the annual fee and by offering interest rates anywhere from zero to infinity. This flexible approach continues today.
Before we go any further, I want to remind you of some things you already know. First of all, no lender ever “gives” you credit. You earn the privilege of using credit based on how well you manage your current financial obligations. Second, credit cards are not an extension of your paycheck. I hear a lot of people every week tell me that they couldn’t afford to buy something, so they put it on their credit card. Here’s a news flash: credit card purchases have to be paid for too! Delaying payment or stretching out payments by charging them does not mean they are forgiven! Finally, remember that credit is a business decision. A lender grants you credit for one reason—because he thinks he can make money off of you. As consumers, we tend to think of money in terms of emotion. A lender always thinks in terms of profitability. Sometimes a creditor makes a profit off you because you pay your bills on time, so he knows his investment in you is secure. If you’re not the world’s greatest at paying bills on time, the creditor still makes money off you, by charging you higher interest rates and fees. Any time you use a credit card, keep in mind how much money it will cost you from the time you swipe your card until you pay off your bill in full. Okay, let’s go on to our credit myths.
This is my all-time favorite because it’s both naïve and hopeful, and yet utterly wrong. It’s like that adorable thing your 2 year old says, that you’re still repeating to friends 40 years later. This is a myth built not so much on a kernel of truth, but rather on a basic misunderstanding of the nature of credit.
I think that creditors and consumers both are equally responsible for this misconception. Creditors mislead people about this topic when they put a due date on a bill, then tack on a late fee for payments received 10 days after the due date. This tactic leads customers to think that they have an extra grace period before they get reported. And that’s not strictly true. The world of credit is very cut-and-dried. You’re either on time, or you’re not. Period. Creditors process payments usually on a 30 day cycle, so the only possible option for a customer is to be on time, or 30 days late.
Many creditors now specify not only a due date but also a due time. This information should be given on your monthly statement. If you’re unsure about any details pertaining to your account, you can always call your card issuer’s toll-free number and ask. If you manage your account online, there should be links to this information for you.Once you know the due date and due time for all your credit obligations, make sure you are able to actually make your payments on time. If a payment date always falls before your paycheck comes in, call your creditor to change your due date. Most creditors will oblige you with this. If you’re using the US mail to send in your payment, be sure to mail your check from a secure mail box (preferably at the post office) at least 7-10 business days before your payment is due. If you’re paying online, set up your transfer to go through at least 72 hours before the due date. Be sure to note your online confirmation number and keep this information until your payment is debited from your account.
Our counselors hear this every day. The something-is-better-than-nothing approach shows that the customer understands the importance of regular payments. And if you’re a good credit customer—by “good” I mean someone who almost never misses a payment cycle—your creditor may let you get away with this. But if you use this tactic too often, you’ll go from being a good customer to a below-average customer, and you’ll see your interest rate and terms change accordingly.For some consumers, this statement is absolutely true. But it is not true for everyone. When it comes to credit card rates and terms, the important thing to know is that most creditors are willing to bend a bit to help their best customers. The trick here is for us to BE the kind of customers a creditor wants to attract and keep.
Creditors always require at least a minimum payment each billing cycle for customers who are carrying a balance on their credit card. Your minimum payment is usually anywhere from 3-5% of your outstanding balance, plus your periodic interest and any additional fees. Creditors typically apply your payment first to any fees (over limit or late payment) on your account. Then, your payment is applied to your periodic interest. After those are covered, any left over funds are applied to outstanding balances. When you make a partial payment, you may cover your interest, but not touch your principal. What this means is that you’re not getting yourself out of debt, but you are enriching your creditors.Never use a cc unless you have a plan for how you’re going to pay off your debt. Ideally, you should be able to pay your balance off in full each month. If you can’t do this, then try to figure out how to pay off your balance in 3-6 months. If you’re having trouble making your credit card payments, contact your creditor to see if you qualify for a hardship program. If you’re constantly juggling credit card payments and having trouble paying your household bills, contact CCCS for a financial counseling session. We can help you set up a budget and find ways to get your spending under control.The best credit customers are the ones who live up to the terms and conditions of their accounts. Creditors are usually very willing to extend a favor for people who pay their bills on time.
This is another myth with some basis in truth. But there are a lot of good reasons why you might want to close a credit card account, and there are even situations where a creditor might insist that you close some open accounts. The key to making this work for you is to understand the best way to close an account, and to always manage your credit with a long-term view in mind.
Credit usage (i.e. your ratio of credit used to total available credit) counts for 30% of your credit score. Consumers have been told for years to use no more than 50% of their available credit in order to maximize their score. Many consumers think they need a lot of credit in order to keep a high credit score. But if you’re working to pay down debt, or if you’re carrying only a couple thousand dollars in debt, you can maximize your credit usage ratio with about $5k of total credit availability. If you’re working to pay down debt and you don’t want to make it easy for yourself to get back in to debt, you definitely should think about closing some of your paid off accounts. Close your accounts in this order: last opened, first closed. Newer accounts lower your average account age, so closing your paid-off new accounts has the least impact on your score.Remember that your credit score is not set in stone. It’s calculated based on all the information in your file at any given moment. A late payment this month to any creditor can lower your score by up to 100 points immediately. Some mortgage lenders will require you to close unused revolving accounts before they’ll finalize your mortgage. Yes, this can lower your score. But having a mortgage, and successfully paying on it, will raise your score higher than if revolving credit was your only debt. Never use your credit score as a basis for managing your money! A good credit score is a reward for successfully managing credit and debt. But if you spend all your money on credit payments, and forget to plan for your future and save money, you’ll be credit-rich but cash-poor!
This is the most dangerous myth people have about credit cards. The flip side to this myth is thinking that a credit card issuer can foreclose on your house or repossess your car if you don’t make your credit card payment. While you won’t lose your house because you missed a Visa payment, you should know that creditors do have legal remedies they can pursue if you fail to make credit card payments as promised.
When you miss a payment, most creditors will call you or send you an email. You’ll get a notice on your next bill politely asking if you forgot your last payment. You’ll also see a late payment fee or missed payment fee of about $39 added to your bill. At this point, you have been reported to the credit bureau as 30 days behind, and your credit score has already fallen about 100 points. If you make up the missed payment and bring your account current, your late payment will show as a “blip” on your overall credit report. But if you continue to delay payment, the creditor will continue to dun you. Usually after 90-120 days, you’ll receive a letter from a lawyer threatening you with court action, or stating that the creditor has won a summary judgment against you. A summary judgment means that a judge has decreed that you have not lived up to the terms of your cc agreement, and that you owe the entire balance in full, plus legal costs. Your credit has been quite damaged now, but if you contact the attorney and set up a payment plan, the creditor will probably still work with you. If you do not respond, the creditor has the right to ask for a garnishment of up to 25% of your wages to repay your credit card loan.If you are withholding payment due to a dispute about your bill, you do have some breathing room. The Fair Credit Billing Act is the consumer protection law that describes how to proceed with a dispute. You must put your dispute in writing to the creditor within 60 days of receipt of the bill containing the disputed charge. Describe your dispute, and include copies of any backup you have that supports your contention. The creditor must notify you in writing that they have received your dispute letter and that they are opening an investigation. While the matter is being investigated, you are not liable to pay for the item in dispute, and no interest charges accrue. However, you ARE obligated to pay any balance due on non-disputed items in your account. After the creditor completes the investigation, they must send you their findings in writing.If you have questions about anything on your credit card bill, your first step should be to contact your creditor. If they cannot resolve the matter, put your dispute in writing and follow the guidelines given above. And remember that no matter what the outcome of any investigation is, you always have the right to add a 100 word consumer statement to your credit report explaining anything in your own words.
All credit users are protected by a variety of federal and state laws. Here are some of the most powerful federal consumer protection laws.
The Top 5 Credit Card Myths
The Top 5 Credit Card Myths…and what they can cost you<br />
Credit Card Facts & Fiction<br /><ul><li>Most profitable segment of lending industry
Credit Remedy<br />Know the due date and due time for all your accounts<br />Plan your spending so that money is available when you need it<br />
Credit Myth #3:<br />MY ACCOUNT WILL STAY CURRENT AS LONG AS I PAY SOMETHING EACH MONTH<br />
Credit Reality #3<br />Understand the business of credit<br />Minimum payments<br />Hardship programs<br />Seek assistance from a reputable credit counseling agency<br />
Credit Myth #2:<br />NEVER CLOSE AN OPEN CREDIT CARD ACCOUNT BECAUSE THAT WILL LOWER YOUR CREDIT SCORE<br />
Credit Reality #2<br />If you’re not carrying a lot of debt, you don’t need a lot of open credit to maximize your score<br />Never close an account unless it has a zero balance<br />Close accounts in order of new to old<br />Your credit score is not set in stone!<br />
Credit Myth #1:<br />THERE’S NOTHING THEY CAN DO TO ME IF I DON’T PAY MY CREDIT CARD BILL<br />
Credit Reality #1<br />Legal remedies for nonpayment include summary judgments and garnishments<br />File disputes according to the guidelines of the Fair Credit Billing Act<br />Respond promptly to any legal summons you receive<br />Consumer Statements<br />
Consumer Credit Laws & Protections<br /><ul><li>Fair Credit Reporting Act: the right to see your credit report; to dispute info in your report; to have incorrect entries removed
Truth in Lending Act: requires lenders to tell you in writing the cost of credit before you accept a credit offer
Equal Credit Opportunity Act: prohibits discrimination in lending practices
FACTA: allows one free credit report each year from each credit bureau</li></li></ul><li>Resources for Consumers<br />US Federal Trade Commission:<br /><ul><li>www.ftc.gov
www.consumer.gov</li></ul>Florida Consumer Protection:<br /><ul><li>www.myflorida.com</li></ul>Miami-Dade County Consumer Services:<br /><ul><li>www.miamidade.gov/csd</li>
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