When you’re looking for a credit card, be sure to consider the costs and terms. They can make a difference in how much you pay for the privilege of borrowing. Compare them with the costs and terms of the cards you already have to find the plan that best fits your spending and repayment habits.

Key costs and terms to consider are the annual percentage rate (APR) for goods and services as well as for cash advances, the annual fee, and the grace period. Also compare cash-advance fees, late-payment charges, and over-the-limit fees.

Besides looking at these costs and terms, think about your typical bill-paying behavior. Do you pay your outstanding balance in full each month? Or do you usually carry over a balance? Matching the credit card plan to your needs could save money.

Credit Card Interest Rates

Credit card issuers offer variable-rate, fixed-rate, and tiered-rate plans. For variable-rate credit card plans, the interest rate is calculated according to a formula. Three of the most commonly used formulas are:

• Index  +  Margin = Variable rate
• Index  x  Multiple = Variable rate
• (Index  +  Margin)  x  Multiple = Variable rate

The most common indexes used by credit card issuers are the prime rate; the one-, three- and six-month Treasury bill rates; the federal funds rate; and the Federal Reserve discount rate. Most of the indexes are published in the money or business section of major newspapers. If the index rate used for your credit card changes, the rate on your card will, too.

The margin is a number of percentage points chosen by the credit card issuer. The card issuer also chooses the multiple.

The interest rate on a fixed-rate credit card plan, though not explicitly tied to changes in another interest rate, also can change over time. The card issuer must notify you before the “fixed” interest rate is changed.

A tiered interest rate means that different rates apply to different levels of the outstanding balance (for example, 16% on balances of $1 – $500; 17% on balances above $500).

Some card issuers may have a policy that raises your interest rate if you make late payments. For example, if you make 2 late payments within 6 months, the card issuer may raise your interest rate from 18% APR to 24% APR. If such a penalty rate applies to your card, the issuer must include a notice in the solicitation materials.

Card issuers may also charge different rates for different types of transactions. For example, the card may carry one rate for purchases of goods and services, another rate for cash advances, and still another rate for balance transfers.

How Much Will You Pay?

The finance charge—that is, the dollar amount you will pay to use credit—depends on your outstanding balance and the periodic rate in your credit card plan:

What Is the Outstanding Balance?

The outstanding balance can be calculated in several ways, and the method of calculation can make a big difference in the finance charge you will pay:

Average daily balance method including new purchases. The balance is the sum of the outstanding balances for every day in the billing cycle (including new purchases and deducting payments and credits) divided by the number of days in the billing cycle.

Average daily balance method excluding new purchases.The balance is the sum of the outstanding balances for every day in the billing cycle (excluding new purchases and deducting payments and credits) divided by the number of days in the billing cycle.

Two-cycle average daily balance method including new purchases.The balance is the sum of the average daily balances for two consecutive billing cycles. One daily balance, that for the current billing cycle, is calculated by summing the outstanding balances for every day in the billing cycle (including new purchases and deducting payments and credits) and dividing that total by the number of days in the billing cycle. The other daily balance is that from the preceding billing cycle.

Two-cycle average daily balance method excluding new purchases.The balance is the sum of the average daily balances for two consecutive billing cycles. One daily balance, that for the current billing cycle, is calculated by summing the outstanding balances for every day in the billing cycle (excluding new purchases and deducting payments and credits) and dividing that total by the number of days in the billing cycle. The other daily balance is that from the preceding billing cycle.

Adjusted balance method. The balance is the outstanding balance at the beginning of the billing cycle minus payments and credits made during the billing cycle.

Previous balance method. The balance is the outstanding balance at the beginning of the billing cycle.

Depending on the balance you carry and the timing of your purchases and payments, the average daily balance method excluding new purchases, the adjusted balance method, and the previous balance method tend to result in lower finance charges than the other balance-calculation methods.

What Is the Periodic Rate?

The periodic rate is the rate you are charged each billing period. Usually the periodic rate is the monthly interest rate, calculated by dividing the card’s APR by 12. If your card has different rates for different types of transactions, then different periodic rates will apply to those balances. For example, if your card has a 12% APR on purchases, the periodic rate for purchases is 1%; and if your card has a 24% APR on cash advances, the periodic rate for cash advances is 2%.

To find out if debt settlement is right for you, fill out our FREE, no-obligation on-line form or call 866-810-3210 and get started on your new debt-free life!

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Income is money that you are earning or the allowance you are given now. When you are extended credit, the creditor needs to determine if you have the financial capability to meet the loan payment schedule. The amount of income needed for a loan depends on the amount and type of the loan. For example if you are borrowing money for a house most creditors will require that your monthly payments not exceed 35% to 50% of your take-home income.

For credit purposes, character is measured by how you pay previous loans or debts. This information is available by way of a credit report. There are three major consumer credit reporting companies in the United States: Equifax, Experian and Trans Union. Creditors report the payment history of their loans to these credit-reporting companies. The credit reporting firms also collect information about other debts you may have. If you have your car repossessed, your homes foreclosed, bounced checks or file a bankruptcy then this information is also reported in the credit report. The information in your credit report is generally kept on file for two to ten years.

Stability is an estimate of how much your financial situation may change during the term of the loan. If your employment is unsteady or unlikely to continue, then the creditor may have concerns about your ability to meet loan payments. If your expenses will be increasing or your debts are expected to grow in the near future, then the creditor may also have concerns about your ability to meet loan payments.

Debts are how much money you currently owe other creditors. This includes credit cards, car loans, home loans, school loans, and all other loans. If you have lots of other loans or a high amount of outstanding debts then a creditor may have concerns. Most creditors have debt guidelines for different types of loans.

For example if your total current credit card debt exceeds 20% total income then you may be considered to have a maximum amount of credit card debt. For a home loan the maximum amount of debt could be as high as 200% to 300% of your total income.

Assets are how much money or value you have on hand. Assets include cash in the bank, savings accounts, certificates of deposit, bonds, stocks, etc. Assets also include cars, motorcycles, a house, or other valuable stuff. Creditors consider assets a safety net for a loan. In some cases creditors will require a certain asset to be listed as security for a loan. This is almost always true for car and home loans. However if a creditor determines you have sufficient assets to fall back on, then they feel more comfortable making a loan.

Expenses are the total of the bills you pay monthly or regularly. Expenses include regular costs for food, rooming, electricity, water, sewer, insurance, tuition, books, car gas, etc. Creditors need to be sure you have enough money left over each month after your expenses to make your loan payments.

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With the convenience of electronic commerce, It’s easy to apply this view to our credit card limits. However, be warned. A credit limit is simply a loan. Of course, once any of this limit is used for purchases, it must be paid back. Many consumers may not think of it this way when they use the credit line. This leads to many people becoming overextended and finding it harder and harder to keep up. In turn they begin to miss payments, pay less than the minimum requirements, or worst of all, file bankruptcy.

Twenty years ago creditors really had two levels of credit, “A” credit, and then everyone else. Those consumers who had “A” credit (in essence, perfect credit) received all the offers, and everyone else simply dealt with not having credit cards and not qualifying for many types of financing. Since then creditors have extended too much credit, which has lead to consumers’ current perception of money and therefore their difficulties paying it back. Today 70% of American consumers have less than ideal credit. This means that creditors have less people meeting their original guidelines for lending and have reassessed the way they lend.

As a result of all of this, creditors have changed the system they use to judge credit worthiness. Instead of just two classifications, they now divide credit applicants into several different levels (A, B, C and even D credit). The applicants with the best credit (“A”) receive better (lower) interest rates. As the consumer’s rating decreases, their interest rates increase. Though a consumer could have a “D” credit rating, they could still receive financing, but the interest rates of such financing are simply mind-boggling. It is not uncommon to see interest rates as high as 29% (we have seen higher). Let’s do the math. For the purposes of this example, we will use the following statistics:

• Consumer 1: “A” credit, 6% interest, $2,500 balance
• Consumer 2: “D” credit, 29% interest, $2,500 balance
• Each consumer paying the minimum payment due (3% of balance)

Consumer 1 would pay back approximately $3,000 over the course of eight and a half years. Consumer 2, however, would pay back close to $9,225 over the course of 21 years. While Consumer 1 would only pay $500 in interest, Consumer 2 would pay back over $6,725 in interest charges on top of the principal. That is a high price to pay.

Since damaged credit will cost you more in the long run, it is a good idea to try to keep your credit rating the best it can be. If you want to have good credit, then you need to use it wisely. Pay the balances in full every month, or if you are unable to, pay substantially more than the minimum due. At the very least be sure to pay the minimum due and always pay your bills on time. Late payments could cause late fees, raised interest rates and can hinder your chances of receiving future financing.

Another thing that can affect your ability to qualify for financing is the creditor you have accounts with. Lenders know who is a “D” lender and who is an “A” lender. If you have accounts with “D” lenders, not only are you paying astronomical interest rates, you may also be compromising your ability to qualify for better types of financing with lower rates. It’s best to maintain accounts with “A” lenders (with lower interest rates) and avoid “C” & “D” lenders (with high interest rates).

Start treating money like money, and credit like credit. Use funds that you have before you start using credit. And when you need to apply for credit, or want to establish good credit, be sure to do it wisely. Apply for credit cards with no or only a small annual fee and a low interest rate. Be wary of low introductory rates, for they usually rise considerably after the first three to six months. Following these tips can help you keep your credit in good shape and pave the road for a better tomorrow.

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Some lending institutions use more than one type of credit report because they are required to as a measure of meeting lending requirements. Others use multiple sources to ensure that they are getting a more comprehensive background on a consumer’s credit history. When a consumer completes a credit application, many creditors submit the personal information that is on the credit application to credit bureaus. This is how the credit bureaus compile personal information such as a consumer’s name, employment information, address, social security number, marital status, and telephone number. By using a credit report, the creditors will be able to cross-reference the information that the consumer provides on their application with the information that the credit bureau accumulated through other credit applications. Many credit institutions hire companies that research and verify that the information on a consumer’s credit application is accurate.

If you have an account with a creditor that reports to a credit bureau, your credit report will reflect a payment and account history. The information that a credit bureau reports regarding a consumer’s history on a credit account is referred to as a “tradeline.” On your credit report, there should be a “tradeline” for every creditor that reports account information to the credit bureau that is providing the report. Following is a summary of the information that is normally included in a “tradeline” on a consumers credit report:

1. Name of the creditor
2. Account number (usually incomplete of coded for security purposes)
3. Type of account (installment loan or revolving)
4. Balance owed
5. Summarized payment history
6. Date the account was opened
7. Credit limit
8. Co-signers on the account
9. Date information was last reported to the bureau

In addition to the information that is normally reported, a “tradeline” may indicate the following:

1. If the account has been included in a bankruptcy proceeding
2. If there has been a repossession of collateral
3. If an account has been charged off
4. If an account has been turned over to collections

Not all credit institutions report to credit bureaus, but most of them do. Most credit bureaus report payment history in 30-day payment intervals because 30-day periods are reflective of monthly billing cycles and payment installments. Policies vary amongst creditors with regard to the threshold at which they report delinquency to the credit bureau. Some creditors do not report delinquency until the consumer’s account reaches 60 days past due, while others report delinquency at 30 days past due. Some creditors do not report any account history to the credit bureau unless there is delinquency on the account.

The “historical method” of reporting delinquency on your credit report will reflect the number of times that you fell more than 30, 60, 90, and 120 days behind on your payment obligations. Other credit reports utilize a rating system that assigns a “status” for each 30-day range of delinquency. This method is referred to as the “simple method of payment.” An R-1 rating indicates an account that was current or paid “as agreed.” An R-2 indicates that a consumer paid 30 days or more after the due date but less than 60 days after the due date. An R-3 indicates that the bill was paid 60 or more days after the due date but less than 90 days past due. An R-4 indicates that the consumer paid 90 or more days past due but less than 120 days. R-5 indicates that a consumer paid 120 or more days past their due date. R-7 usually means that a creditor repossessed collateral on the account and R-8 reflects that the account was turned over to collections. R-9 can be used to reflect many different statuses on an account. It may be used to reflect that a debt was discharged in bankruptcy, repossessed, foreclosed upon, or in collections.

Credit reports often include a section that provides information that is considered public record such as tax liens, judgments, and arrests and convictions. Credit reports also give records of inquiries. Inquiries are records that reflect requests made by creditors to a credit bureau for a consumers credit report. Inquiries indicate the name of the creditor that requested the report and the date on which the report was requested.

Following are factors that are of particular interest to lenders:

• Does the applicant have a stable job? How many years have they been at their place of employment? Do they have a responsible job title?
• Does the applicant have a stable style of living? Have they been at their place of residence for five years or more? Do they own or rent their home?
• Does the applicant exhibit stability with their finances? Do they have a checking and savings account? Do they have many recent inquiries?
• Does the applicant have a good payment history on existing and previous lines of credit? Do they have a past credit history free of judgements, bankruptcies, charged off accounts, or other signs of financial mismanagement?
• Does the applicant have a favorable debt to income ratio? (Debt to income ratio is a comparison of your outstanding indebtedness the income that you have to support debt repayment) Does it appear as though they are overextended on credit?

Credit Scoring

Creditors often rely on credit scores to help them determine the risk of lending to consumers. The information on a consumers credit file may be used to compile a score that will be used to determine if a consumer is granted a loan or line of credit. If a decision is made to grant a line of credit to a consumer, the credit score may be used to determine the interest rate that will be applied to the loan or line of credit. Generally speaking, the riskier it is to lend to a consumer, the lower the chances are that the consumer will be approved for the line of credit and the higher the interest rate at which the consumer will be required to repay the debt at if they are approved.

Many lenders have “in house” scoring systems but they also rely on scoring models that are provided by credit reporting bureaus. Different credit bureaus use different credit scoring models, but the standards of determining a consumers credit worthiness are consistent from model to model and they are based on the Fair Isaac Company’s scoring criteria. The scoring system that is used may be termed a “Beacon,” “Empirica,” or a “FICO” score depending on what credit bureau is supplying the score. Some lenders rely upon “merged” credit reports that provide a compilation of consumer account and credit scoring information from more than one reporting bureau.

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1. Secured loans may be more expensive to acquire. Only a handful of lenders may approve you for mortgage and car loans. Acquiring a loan or mortgage may require an initial down payment of as much as 50%, and you may need to accept interest rates significantly higher than those offered to people with clean credit histories.
2. Unsecured loans may be impossible to acquire. Credit card companies typically reject applicants with bankruptcies on their credit histories. You may only be able to obtain a secured credit card, which requires a security deposit typically equal to the amount of credit initially granted. Fees for these cards are generally higher than for unsecured cards, and issuers may charge an application fee.
3. Not all retirement account assets are protected. Qualified retirement accounts, such as 401ks, are protected in all bankruptcy filings. And, up to $1 million in an individual retirement account is protected. Federal law requires that only those assets needed to support a filer and dependents are exempted, so you may only be able to keep a portion of an IRA account.
4. New legislation makes filing for bankruptcy more difficult. The Bankruptcy Reform Act of 2005 prohibits some people from filing for Chapter 7 bankruptcy; adds to the list of debts that people cannot get rid of in bankruptcy; makes it harder for people to come up with manageable repayment plans; and limits the protection from collection agencies for those who file for bankruptcy. In addition, anyone filing for Chapter 7 or Chapter 13 must undergo credit counseling at their expense six months prior to filing for bankruptcy and will also be required to take a financial-management course after filing.

Any individual contemplating bankruptcy due to unmanageable debt problems should seriously consider alternatives before moving forward with a Chapter 7 or Chapter 13 filing. With many qualified debt settlement  professionals available to help individuals settle their outstanding debt, many people find that there may be legitimate alternatives to bankruptcy with potentially fewer long-term repercussions.

This article is for informational and educational purposes only.  It is not intended to provide legal, tax or financial analysis.  Please consult your attorney, accountant or tax advisor if you have legal, financial planning, or tax related questions.

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Credit Score Shell Game

As High Scores Vanish, Borrowers’ Luck Runs Out

Read the full article here.

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By examining the charts below, you can see that even relatively small shifts in your credit score can make a big difference in the rates you pay. And, what seems like a small difference in monthly payments can add up over time.

To put these savings into perspective, let’s say you invested $100 per month of money saved into a simple mutual fund that earned on average 10 percent per year. Well, after 40 years, your savings would be valued at somewhere around $559,500. You get the idea.

So remember, be diligent in keeping your credit score healthy – now and well into the future – because as you can see, credit scores really do matter.

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Good news! Some welcome relief is in the works, courtesy of the U.S. government.

At the beginning of May, the Federal Reserve Board proposed a set of new regulations that would help to protect consumers against the aforementioned practices and a number of others considered to be unfair. These rules, proposed for public comment under the Federal Trade Commission Act, are a follow-up to the board’s 2007 proposal for improving credit card disclosures under the Truth in Lending Act.

The proposal includes five major protections for credit card users. (Note that although we’ll use the term “bank” throughout, these rules would also apply to other institutions such as savings associations and federally chartered credit unions.)

1. Rates on Preexisting Balances — Banks would be prohibited from increasing the APR on a preexisting balance (except under certain limited circumstances), and would have to permit the consumer to pay off that balance over a reasonable period of time.
2. Above-Minimum Payments — Banks would not be permitted to apply payments over the minimum in a way that maximizes interest charges.
3. Discounted Promotional Rates — Banks would be required to extend the full benefit of discounted promotional rates by (1) applying payments over the minimum to any higher-rate balances; and (2) offering a grace period for purchases for which the consumer is otherwise eligible.
4. “Two-Cycle” Billing — Banks would be prohibited from assessing interest charges using the “two-cycle” method, which calculates interest on balances on days in billing cycles preceding the most recent one. (In effect, the cardholder gets hit with a double whammy because interest is charged retroactively to the date of purchase—even if it’s the month before.)
5. Reasonable Payment Time — Banks would have to give consumers a reasonable amount of time to make payments.

Also included are regulations affecting payment of deposit account overdrafts, whether they’re created by a check, an ATM withdrawal, a debit card purchase, or some other type of transaction. Financial institutions would be required to provide consumers with notice and an opportunity to opt out of overdraft payments.

According to a Federal Reserve Board member, these and other proposed rules “would provide the benefits of substantial protection against practices that can harm consumers.” At a time when consumers are under relentless financial pressure on so many fronts, it’s reassuring to know that someone is watching our backs.

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Many card companies explain expiration dates in terms of security and protection. Betty Reiss, spokeswoman for Bank of America concurs, “(expiration dates) provide another verification point.” And while this is certainly a valid reason, expiration dates are becoming less significant as the industry moves toward electronic authorization of transactions. Moreover, cards can crack or the magnetic strip simply wears down. As a result, every three or four years as determined by the card company, you are sent a shiny new card ready for use.

However, more than being just an act of good customer service, the replacement of a card also allows the issuer to update information about the cardholder – a self-serving exercise.

• Cross-Sell Opportunities: An expiration date provides the company with an opportunity to update your personal information in order to market other services. Included in the mailing of your new card you may find a number of advertisements for new products and specials offered by your Credit Card Company or bank.
• To Keep in Touch: If you have been a customer for a number of years, this is a chance for the company to re-establish contact. Moreover, if your card is active, but has been inactive for some time, the new card may serve as a reminder to the consumer that this credit is available for use.

Why is this information important to you?

Well, to begin, in the age of security protection, it makes sense to know when a new card has been mailed so that if you don’t receive it (especially before your old card expires) you can notify the issuing company. And, remember to cut up your old card once you activate your new one. This will reduce the chances of confusing one card for the other as well as preventing identity theft and fraud.

Further, many credit card companies will send a new card with new terms and conditions. It is important that you read the new terms of your agreement for changes in billing cycles, APR, and due dates. If you are not satisfied with these changes, you may be able to renegotiate your contract, or at the very least, pay off your remaining balance under your old terms before closing the account. If you believe that your issuer values your business, you are generally able to negotiate for a better rate or terms.

For those DMB clients who have completed the debt settlement portion of their program and are nearing the end or have completed their credit enhancement agreement, they may soon find their mailboxes filled with “pre-approvals” and new card offers. Be diligent about re-establishing a new credit card contract with one of your previous creditors since re-opening a credit card that has been settled or closed may lead to a myriad of changes in terms, conditions, and expiration dates.

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Fortunately, there are ways you can fight back and avoid credit fraud:

Fraud Alerts

If a fraudster tries to get credit in your name, he or she can be stymied if you’ve added a fraud alert to your credit report. The creditor, in checking your credit, will find a statement that says something like, “I may be a victim of fraud. Call me at [your phone number] before extending credit.”

There are two kinds of fraud alerts, both free:

90-Day Alert: Maybe you suspect, but aren’t sure, that you might have been the victim of an identity (ID) theft. Ask one of the three major credit bureaus to contact you whenever you apply, or someone claiming to be you applies, for a credit purchase within 90 days.

The credit bureaus are:

Equifax: Phone 1 (800) 685-1111. Web: www.equifax.com

Experian: Phone 1 (800) 888-397-3742. Web: www.experian.com

Trans-Union: Phone 1 (800) 888-4213. Web: www.transunion.com

7-Year Alert: You should also consider this other, less common alert – which remains active for seven years – when you must prove to the credit bureaus that you’ve definitely been a victim of ID theft. With this alert, you will be asked to provide documentation from your credit card companies or other financial institutions.

Credit Freeze

A credit freeze (also called a fraud freeze or security freeze) offers more protection than a fraud alert. Once it goes into effect, potential creditors or insurance companies can’t access your credit information until you give permission to unfreeze it. Should they contact you to request an unfreeze, you’ll know if someone is trying to steal your identity.

This service is available in all fifty states and Puerto Rico. If you’ve been an ID theft victim, you can list your account without charge in most states; if you haven’t, the credit bureau will assess a small charge to set up the freeze and then unfreeze it later. For more information, visit www.consumersunion.org.

Fraud alerts and credit freezes can’t guarantee total protection, because some creditors unwisely issue credit without checking a credit report. But most financial institutions routinely use credit checking to protect themselves. And by protecting themselves, they’re protecting you.

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