Some Tips to Help You Get a Grip on Credit
Pay your bills on time to maintain a good credit record and qualify for low rates. Don't wait until the last minute to pay your monthly bills. Not only will you incur late-payment fees but perhaps more importantly you risk triggering higher interest costs. That's because your payment history on your debts and bills is one of the biggest factors in your credit report and credit score.
A credit report is a compilation of how you pay your credit card bill, loans, rent, and selected other debts and bills. A credit score is a number that is based on your credit report and reflects your financial responsibility. Both are part of your overall credit history, which can determine your chances for a low-cost loan or a lower interest rate on a credit card.
While one or two late payments over a long period of time may not significantly damage your credit history, if at all, making a habit of missing payments can result in a higher interest rate, higher fees or both when you apply for any type of loan or credit card. Lenders put more emphasis on your recent payment history, so be particularly careful with payments in the months before you apply for a loan.
Always pay on time. Consumers who pay their credit card bill late may face a major hike in their interest rate often to between 29 and 35 percent. Late payments on that card also can trigger rate increases on other cards or loans, especially if your credit record shows other signs of risk.
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There are good reasons to have at least two credit cards, but some people collect a stack of cards, including those from stores and oil companies, several of which they rarely use. One problem with having a lot of credit cards is that lenders look at the ones with no existing balance or a very low balance and conclude that you have the potential to use them and get into debt. Even if you've been a responsible user of credit, these extra cards could come back to haunt you the next time you apply for a loan.
Having more credit available than you can safely afford can hurt you in the long run. Suppose you have several credit cards and the combined outstanding balance on them is $10,000 below your credit limit. Then you apply for a home loan. The mortgage lender may question your ability to repay both a mortgage and $10,000 worth of new purchases on your credit cards. And, your overall credit score can suffer, resulting in the lender charging you a higher interest rate or denying the loan altogether.
Cancel credit cards you rarely or never use,
preferably well before you apply for another loan. Start by closing
your newer credit card accounts. That's because your credit score can
be lowered if your credit history appears shorter than it really is.
Another option is to ask your card issuers to reduce your credit limit.
Check your credit report for accuracy. Something as simple as correcting incomplete or erroneous information in your credit record may be enough to qualify you for a better interest rate on a loan or credit card and save you hundreds of dollars each year in interest payments. For example, if you always pay your loans on time, but your credit report shows late payments, you'll want to correct that.
By federal law, you are entitled to one free copy of your credit report every year from each of the three nationwide credit bureaus - Equifax, Experian and TransUnion. Each company issues its own report, so it's smart to check each one. Although you can ask to receive copies from all three credit bureaus at the same time, you also can spread out your requests throughout the year to check for major changes or inconsistencies.
Identity theft is
another reason to regularly review your credit reports. Make sure an ID
thief hasn't opened credit cards or other accounts in your name to
commit fraud
Review your existing loans and credit cards with an
eye toward saving money.
"Talk to a customer service representative at your bank to make sure
you're signed up for the accounts and features that best fit your
needs, especially if your financial situation has changed recently,"
said Janet Kincaid, FDIC Senior Consumer Affairs Officer. "For example,
if you tend to carry a balance on your credit card, find out if you
qualify for a credit card with a lower interest rate or other features
that can cut
Compare the loan or credit card products offered by your bank and a few competitors and then negotiate the best deal. Remember you are a valued customer. Don't hesitate to let lenders know that you are shopping around for the best possible terms and that you are not afraid to negotiate. Competition can be a good thing.
One of your most important shopping aids for a loan or credit card is the APR - the Annual Percentage Rate. This required disclosure shows the total cost, including interest charges and other fees, expressed as a yearly rate. When you're comparing loans from different lenders, make sure you use the same dollar amount and time frame so you can compare the APRs. That way there's no confusion about which loan will cost less.
Focus on the long-term cost of the loan, not the monthly payment. "Many car dealers or even mortgage lenders will entice borrowers by asking how much they can afford to pay each month," added Kincaid. "It may be better to pay slightly more money each month, but for a shorter time period, if it means you will be paying less in total interest."
She also said that some people look so much at the monthly payment that they don't notice certain fees or service charges that are imposed. "You've got to look at the full picture before signing a loan agreement, including the APR and provisions of the loan that can increase fees," Kincaid said.
You can
also avoid
unnecessary interest charges if you pay for
certain costs out of your own pocket instead of borrowing that money,
too. Let's say you're getting a new mortgage and you're offered the
chance to add the closing costs to the loan instead of paying them
upfront. Sounds good on the surface, but remember that you're not
getting out of paying the closing costs - they're added to the
loan
balance, so your monthly payments will increase and you'll be paying
interest on the closing costs.
Always read
the fine print before signing up for any loan or credit card.
For example, realize that if you get a new credit card promoting
zero-percent interest on new purchases and you don't pay off the entire
balance
by the due date (typically after six to 18 months), you may be charged
interest on all your original purchase amounts - not just on the
remaining balance - retroactive to the original purchase date. The
costs could be more than if you had used a card without a zero-percent
offer. With a mortgage loan, find out when your payments will or could
change and how much higher the payments would be under different
scenarios. What you don't read and don't know can cost you a lot of
money.
Don't pay for expensive insurance coverage you probably don't need. Many lenders sell disability, life insurance or other similar protection plans which, as an example, might cover minimum loan payments due if the borrower becomes ill or dies. Credit protection programs may be the best or only coverage for certain people who want this kind of protection, such as some consumers who are ill or who are concerned about making loan payments if they lose their job. But these plans may be far more costly or more limited in purpose than other options, such as traditional insurance not tied to loans.
Before purchasing a
credit protection product, consider if you
already have, or would be better off with, traditional insurance. Look
at your savings and other assets, because you may have sufficient
emergency funds to do what these programs promise if you become sick or
unemployed. Also remember that most credit protection is optional.
While it may
sound
like a bargain to pay the minimum due on your credit card so you have
more money to spend on other things, the long-term costs of this
strategy can be staggering. That's because credit card interest rates
can be quite high - with the best of rates often being in the low
double-digits. Instead, try to pay
all or as much as possible of your balance each month to avoid
interest charges.
Avoid
late-payment fees. These are penalties, often $20 or more, charged by
your lender when
you don't make a loan or credit card payment on time. One way to
prevent late fees is to arrange, at no charge, for an automatic
withdrawal from your checking account to cover these and certain other
recurring expenses (such as a utility or insurance bill). The automatic
debiting of your account also takes the hassle out of making scheduled
payments and saves on postage.
Closely review your account statements and other mailings from your lenders. Check your statements as soon as they arrive to look for errors, unauthorized withdrawals and other matters you might want to question or challenge. The sooner a problem is detected, the easier it is to correct. And if you don't report an error within prescribed time limits, you may not be covered by some federal consumer protection rules.
Also, don't assume
that literature inside a loan statement or credit
card bill is junk mail. It could be your only notice of new fees, an
increase in the interest rate, or other significant changes. If you
don't monitor these mailings, you could pay more for banking services
and not even realize it.
Don't be afraid to ask for a break. Do you think the fees for your mortgage application are a bit steep? What about the fee you were charged for being late with your loan or credit card payment? Depending on the circumstances, your lender might be willing to reduce an interest rate or waive a fee or penalty, especially if you've been a good customer. Even the interest rate on your credit card may be subject to negotiation.
Also talk to your banker if you're having problems repaying a loan. Explain the situation and any unusual circumstances. Many lenders will agree to temporary or permanent reductions in your loan interest rate, monthly payment or other charges. Communication is key.
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