Aside from school loans, many students shy away from running up debt while still in school – and wisely so. But they should still have and use credit cards in order to build the
credit scores they’ll need after graduation.
High credit scores will assist the student’s entry into the working world in many ways.
First, they will help them land that first job, because many employers do look at credit scores before hiring. Next, they’ll help them find a home or apartment to rent – because landlords check credit scores, too. After that, they’ll help with the ability to get a cell phone, sign up for cable TV, and of course, buy a car or a home.
Used as a tool, credit cards will help build those credit scores.
Start with one, use it carefully, and then in about 6 months, make application for another. Owning 2 or 3 cards that are reporting good things about you will help you enter the work world with high scores.
What is careful use? Use the card sparingly and charge no more than 30% of the card’s credit limit in any one month. Then pay it off each month when the statement arrives. Always pay on time, and if you absolutely can’t pay the entire balance, pay all you can – at least the minimum.
If you’ve had to go above the 30% for an emergency, go on line and pay the card back down to that level before your statement is issued. The amount that shows as owed on your credit report is the amount listed on the statement, so you can avoid going over that limit by paying early.
If you can’t get a card of your own, ask a parent or other financially responsible person to allow you to “piggyback” on his or her account. You’ll be added to the account and that person’s good financial activity will be reported to your account. You don’t need to have or use the card yourself unless they never do. The account does need to show some activity at least quarterly.
If you choose this route, be sure to choose wisely. Someone who charges more than the recommended 30% or who pays late will do you harm rather than good.
If you must, obtain a secured card with a credit card issuer who reports to the credit bureaus. Yes, you’ll be using your own money, but yes, you’ll be building your credit scores, and that’s what this is all about.
Credit card issuers stand to lose considerable revenue sources when the Credit Cardholder’s Bill of Rights laws go into effect.
“Fee-harvester” cards, for instance, stand to lose as much as 46% of the revenue they’ve been generating from these subprime credit cards. These cards, which are typically issued to people who do not qualify for standard credit cards or student credit cards, carry fees which can right now run as high as 71% of the card’s initial limit.
Fees can include: Application fees, program fees, account set-up fees, annual fees, and monthly participation fees. In one example, a card with a $250 credit limit carried $178 in immediate debt – before the cardholder even had a chance to access the $72 left in his credit line.
Under the new law, credit card issuers will be restricted to charging 25% of the card’s credit limit in such fees. However, there will still be no limit on the interest rate charged.
Over limit fees will also become a thing of the past for some consumers. Right now, you will likely be allowed to charge over your limit – saving you the embarrassment of a “turn down” at a retailer’s check-out counter. But that privilege carries a heavy fee – often $39 or more for each overlimit charge.
Under the new law you can opt out of the privilege to go over your credit limit, which may cause embarrassment, but will prevent overlimit fees. In addition, the credit card issuer will be limited to charging one overlimit fee per billing cycle, rather than a separate fee for each transaction.
Consumers will now have the option to pay either on line or over the phone – with no fee. Presently many credit card issuers offer free on-line payments, but charge as much as $15 for accepting a payment over the phone. Card issuers will still be allowed to collect a fee for expedited payments, so you should still pay a day or two ahead of time or at least early in the day on the due date.
For mail-in payments, card issuers will be prevented from charging late fees for payments received on the due date, or on the next day if the due date falls on a Sunday or holiday when mail is not delivered. When payments are made at a local bank, they must be credited the same day.
Owning a secured credit card can be one of the most effective ways to raise your credit
scores after a financial disaster. It can also be the way to build a credit score if you’re just starting out. Owning a secured credit card can be one of the most effective ways to raise your credit
In order to obtain a secured credit card you simply deposit a sum of money into a savings account which is held as security against charges you’ll make on the card.
Some question the reason why anyone would want such a card – when they have to put up the money ahead of time to get it. One reason is convenience.
As long as you aren’t over-limit, a secured credit card will be accepted in places where a check is not. So if you don’t have the cash in your pocket, you can still make a purchase. And of course, when you want to save money by shopping on line, a credit card is a must. It’s true that you can use services such as Pay Pal by accessing your checking account – but since merchants have to wait several days for payment, not all will accept that form of payment.
The second reason is that using that secured credit card will help you build a good credit score.
By keeping your purchases under 30% of your credit limit and paying every statement as soon as it arrives, your credit scores will begin to climb. The savings account itself is a boost to your credit rating too.
When you have consistently “paid as agreed” for a period of time, you can contact the credit card issuer and ask to have your secured credit card upgraded to an unsecured credit card. At that time, you’ll get back the savings account money, with interest. But since having a savings account as well as a checking account does increase your credit scores, you should continue keeping that money in a savings account. Adding to it regularly is also a good move.
Once you have established your ability and willingness to pay your accounts on time, you’ll be able to ask for a higher credit limit, which will also increase your credit scores.
Remember to limit your use of the secured credit card – and later the unsecured credit card – to 30% or less of your credit limit. Even if you pay the balance in full each month, the balance at the time the statement is issued is what goes on your credit report. You don’t want your credit report to show that you have “maxed out” on any credit card.
Rewards credit cards could very well become victims of the Credit Cardholders’ Bill of Rights of 2009.
The new laws, most of which will go into effect in February 2009, will reduce credit card issuers’ revenues significantly. That means they’ll be looking for new and different ways to boost their profits. Phasing out rewards credit cards may be one way.
Why will the changes harm the banks’ profits? Because several provisions of the new laws will limit their ability to increase interest rates at will.
Right now a card issuer might mail a promotion promising a low “non-promotional” rate that convinces consumers to transfer balances - or simply to spend more than they should. They begin to carry a large balance, but don’t worry because the interest rate is so low – until they open a statement one day and find that their old 5.99% is now 25.99%.
What happened? The credit card issuer exercised its right to raise rates at “any time for any reason.” One common reason right now is a late payment – even if that payment was mere minutes late – or a default or late payment on some other account.
Experts predict that this prohibition alone will cost the credit card issuers an estimated $10 billion in lost revenue.
Banks will still be able to raise your rate on existing balances – but only if your payment is 60 days or more late. And then… if you make the next 6 payments on time, they’ll be required to drop the rate again.
The ban on rate hikes doesn’t apply to introductory rates, which you accepted with the clear understanding that the rate would raise on a set date. That date, by the way, must be at least 6 months from the date the card is issued or the convenience check written.
Since these changes don’t go into effect until February or later, credit card issuers will be spending the next few months raising rates, adding fees that weren’t covered in the law, and cutting costs.
Since Rewards cards are often used by those who pay their bills in full each month, they may be seen as an additional drain on profits, and be phased out. If you have a rewards card, you should collect on those rewards now, and do so often. If the programs disappear you may not be able to collect on unused rewards credits.
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