Credit Card Quick

How Savvy are you when it Comes to Handling your Credit Cards?

Choosing Credit Card

We’d all like to think we are credit card savvy, but with all the changes to the credit card sector over the last year, who can keep up? It seems like every day either the credit card companies or the government are changing the rules when it comes to credit cards usage, thereby leaving many of us in the dark about what’s right and wrong, and good and bad, about our credit cards.

Here are a few True or False statements to quiz yourself on your credit card savvy:

True or False: The more credit cards I have, the better my credit score will be.

False: Although more credit cards may mean a higher available credit and a lower debt-to-income ratio, many individuals with multiple credit cards may find themselves in trouble because of their availability to too much credit. In other words, some individuals may have the best luck using just one or two cards, while other individuals may be able to handle more credit cards. A good rule of thumb when it comes to credit cards is to never take out more than you can reasonably handle in any given month. And don’t worry about your credit score, as a flawless payment history on one credit card will always be better than a spotty payment history on multiple cards.

True or False: My credit score will remain strong as long as I pay my credit card bills on time.

False: Although a large portion of your credit score is determined by your payment history, the credit reporting bureaus also look at several other factors, including your credit history and your debt-to-income ratio. In other words, just because you pay your bills on time each month doesn’t mean you will have the highest credit score on the block. Instead, focus your efforts not only on your payments, but the amount of debt you have.

True or False: I am always better off taking advantage of a balance transfer offer.

False: Don’t assume that just because a credit card company offers you a balance transfer offer with a low, zero-percent introductory offer, it doesn’t mean it is the best financial choice for you. You must also pay close attention to other factors, including: the default interest rate once the promotional rate has ended, the balance transfer fee, and the card’s general terms and conditions.

Does your Credit Card Help or Hinder your Credit Score?

Credit Score

We all assume that our credit cards, when used correctly, will help our credit score ranking. After all, establishing a history of charging and paying will prove our credit worthiness and bump up our credit score, right?

Well, that’s right most of the time. However, like most financial cases, this does not always hold true.

In particular, take note if you have a Visa Signature, World MasterCard or American Express credit card. These credit cards are generally reserved for those with high incomes and excellent credit and therefore come with the NPSL feature, which stands for No Preset Spending Limit.

You may think that if your credit card comes with the NPSL that you are free to charge as pleased, with no implications. However, your spending may very well be limited – unbeknownst to you.

What are NPSL Credit Cards?

NPSL credit cards generally come in two varieties: NPSL credit cards, which allow you to spend a certain, undisclosed amount, but require you to pay off your balance each month; and NPSL credit-hybrid cards that feature a revolving line of credit that allow you to exceed your limit, provided you pay any amount over your credit limit in full each month.

What many individuals fail to realize that many of these NPSL cards do come with a spending cap and, if your reach that amount (which may be unknown to you), your card will be declined. So, instead of enjoying the benefits of having no preset spending limit, you may be fooled into thinking your card will never be declined – only, of course, to have it declined, which can be incredibly inconvenient and embarrassing.

Detrimental to your Credit Score?

In addition, the way NPSL cards are reported to the three credit reporting agencies may be downright detrimental to your credit score. This is because one of the factors considered when determining your debt-to-income ratio is your credit utilization. If the credit limit is unknown by everyone except for the credit card company, including the credit reporting agencies, your credit utilization cannot be accurately calculated, thereby possibly lowering your credit score.

In short, it may be best to stick to a competitive, low-interest-rate credit card and avoid NPSL credit cards if you are concerned about your credit score.

A (Relatively) Painless Guide for Improving your Credit Score

Credit Score

If your credit score is lower than desired, take heart. There are many ways in which you can begin rebuilding your credit and redeeming your credit score.

Your credit score is incredibly important, as it will determine your eligibility for certain types of loans and credit, and will be a big determining factor when it comes to competitive rates.

• Pay all of your bills on time – OK, so this may sound like simple advice, but it is still worth mentioning. Many people think that paying a few bills late here and there will not affect their credit score but, in reality, it can lower your credit score quite a bit. If you have trouble managing your monthly bills, consider signing up for online bill payments, either through your bank or through your creditor. This will allow you to set up payment dates and amounts, thereby ensuring that your bills will be paid on time, each and every month.
• Order a copy of your credit report – It may be a bit painful to look at your credit report, but it is necessary for rebuilding your credit. Take the time to thoroughly review your credit report from all three credit reporting agencies and check for errors. Errors and discrepancies can be quite detrimental when it comes to your credit score, so immediately report any problems to the appropriate agency.
• Check your debt-to-income ratio – How much of your available credit are you currently using? Much of your credit score is determined by your available credit, also called your debt-to-income ratio. For example, if you have a credit card with a $9,000 balance and your limit for that card is $10,000, you will likely have a very high ratio. The best way to combat this ratio is to pay off your credit cards and keep your credit lines open. In addition, it is best to avoid canceling any credit cards, as this lower your available credit and subsequently lower your credit score.

How a Creditor Determines your Credit Limit

Credit Score

Have you ever wondered why you have the credit limit that you do?

Whether you were approved for less – or more – than you thought, you should know that there is actually a formula that credit card companies use to determine your credit limit.

• The first thing a credit card company will do when you apply for a credit card is look at your credit score. Your credit score (often referred to as a FICO score) is a clear indication of how you have managed your debts in the past. The scoring used in a credit score also predicts your ability to repay loans in the future.
• Credit card companies, after they look at your credit score, will then look at your debt levels and your income. Your debt levels, also commonly referred to as a debt-to-income ratio, is a common reason why many people, although they may have a gleaming credit score, will have lower credit limits. It is the credit card company’s way of protecting credit card customers from more debt than they can financially handle.
• In addition to looking at all of the above factors, a credit card company will also examine your current outstanding credit, or the amount of credit on other loans and credit cards that you have open and available. For example, if a credit card company notices that you have another credit card, but that it is maxed out, this may raise a red flag that you are taking on more debt than you can handle; as a result, your credit limit may be significantly lower than your previous credit card.

Many times, your credit card company will automatically raise your credit limit if you have established a good track record of punctual payments. However, it is also important to point out that creditors are also able to lower your credit limit if you show a steady of history of late payments.

The best thing you can do maintain a good credit score and ensure that you are eligible for higher credit limits is to make your payments on time, each and every month, and to keep your spending in check and not top out your credit limit.

The FICO Score Problem – How it May Become Your Problem

Credit Score

Many of us have watched helplessly as our creditors started slashing our credit limits. Many banks and lenders began cutting credit limits in an attempt to avoid additional losses after the credit crisis took its grip on the economy. As a result, many of us saw our credit card limits being cut – often in half.

However inconvenient or irritating this may seem, it may actually be much, much worse.

Why?

Well, it all begins and ends with the FICO score model. Your FICO score is often directly related to your debt-to-income ratio. So, if your $20,000 credit limit is suddenly slashed to $10,000 then your open credit all of a sudden took a hit – and so did your FICO score.

The worst part, perhaps, of this whole FICO score mess is that many cardholders have seen their credit limits slashed simply because the creditor or bank was looking to avoid losses, not because of anything they did or didn’t do.

As credit limits continue to be cut (with many financial experts predicting that this will only get worse, given the new credit card legislation), many consumers are now watching as their FICO scores fall. In fact, FICO estimated that more than 30 million Americans saw their credit limits reduced in 2008 alone.

A lower FICO score, as many consumers already know, will make the consumer look like more of a credit risk. This, in turn, often means that their ability to secure a loan becomes more difficult, and that they will begin paying higher interest rates than their financial counterparts.

In other words, the FICO scoring system, at this time, may be quite an inaccurate way to gauge an individual’s credit risk.

Is there anything you can do?

Unlikely. You can certainly call your bank and plead your case; however, the credit reductions are usually set in stone and done across the board. The best thing we, as consumers, can do at this time is to keep available credit open, to not cancel any credit cards, and to pay down our balances on our existing credit cards and loans.

How Many Credit Cards do you Really Need?

Choosing Credit Card

We hear conflicting opinions all the time regarding the number of credit cards we should have, must have, and never exceed. But what is the magic number?

Well, for starters, there is no magic number, and what works for you in terms of the number of credit cards may very well not work for another individual. There are, however, a few points to remember when considering your perfect number of credit cards:

• Pay close attention to your debt-to-income ratio. If you have a card with a balance that exceeds 50 percent of your credit limit, then you may be entering into dangerous territory because many creditors may perceive you to be a credit risk. However, if you exceed 50 percent of the credit limit on one of your cards, it may not be such a big deal, credit-wise, if you have another card or two with low balances, as this will decrease your debt-to-income ratio.
• Consider holding at least two credit cards if you feel comfortable that you can effectively and responsible manage the two cards. However, if you tend to spend on your credit cards then a second credit card may not be the right decision for you. Again, this is where “one sizes fits all” does not apply.
• Don’t hold so many credit cards that you have difficulty managing them. In other words, if you have 10 cards, all with low balances, then you are ahead of the game. However, if these 10 cards create confusion when it comes time to paying them, then they certainly are not worth the hassle, even if you have a fantastic income-to-debt ratio as a result. If you are unable to effectively manage your cards then chances are you will miss due dates and payments, thereby negatively affecting your credit score.
• Be careful about closing credit card accounts, as this may negatively affect your credit score; specifically, your income-to-debt ratio.
• Consider choosing major credit cards (Visa, Master Card, Discover and American Express) over department store credit cards, as major credit cards typically have higher credit limits (which have a positive effect on your income-to-debt ratio) and lower interest rates.