CREDIT CARD RATINGS

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About Credit in the United States

There are two main types of credit:

Installment loans let you borrow a fixed amount and pay it back in fixed monthly payments. A good example is a car loan, where you will borrow enough to buy the car and then pay it back over two to five years.

Revolving accounts or “lines of credit” give you a certain amount you can borrow against (your “credit limit”). You can usually then pay the balance off in full or make smaller minimum payments. A good example of a revolving account is a credit card.

Warning! The minimum required payments on most credit cards is so small that even a balance of $500 -- $1000 can take years to pay off if you only make the minimum payment each month. Some loans are secured which means you pledge collateral the lender can “repossess,” or take back, if you don’t pay the loan as agreed. Most car loans and home loans are secured loans. Other loans, especially credit cards, are unsecured, which means
there is no collateral for the loan. Unsecured loans can be harder to get because there is nothing to back up the loan, other than your promise to pay.

Getting Approved

One of the reasons credit is so widely available in the United States is because we have a strong credit reporting system. Credit reporting agencies (also known as “credit bureaus”) are companies that collect information about how consumers pay their bills, and sell that information as credit reports to businesses that may use them for credit, insurance, or employment purposes. Credit reports contain four basic categories of information, including personal information (name, current and previous addresses, Social Security Number), account information (credit accounts
you’ve held, the most you’ve borrowed, the current balance and whether you’ve paid on time), public record information (bankruptcy, court judgments or tax liens) and inquiries (the names of companies that have looked at your credit rating in the past two years).

Equal Credit Opportunity Act

Under a federal law called the Equal Credit Opportunity Act, creditors cannot discriminate against you because of your age, gender, marital status, race, or country of national origin. Types of accounts typically included in a credit report include:

Credit cards
Department store cards
Gas company cards
Bank loans
Auto loans and auto leases
Recreational vehicle loans
Mortgages
Consumer finance company accounts
Credit union credit cards or loans
Types of accounts that traditionally do not appear on a
standard credit report:
Rent payments
Rent-to-own accounts
Payday loans or loans from check cashing outlets
Checking account information
Accounts with smaller lenders
Debit cards

Some creditors will only report your account if you are late on yourpayments, but not if you pay on time. Cellular phone companies are a good example of this. They generally only report accounts that have not been paid and have been turned over to collection agencies. The same is true of most medical providers. Since companies are not required to report information to credit reporting agencies, not all do. Some will report to one or more major credit reporting agencies, but not all three of them. When you are establishing credit, your goal should be to get accounts that will be reported each month to all three of the major credit bureaus. Be sure to pay each bill on time or you may risk a late payment on your credit report. Late payments stay on your report for seven years and make it more difficult to get credit at good rates and terms.

It’s In The Numbers

When you go into many retail stores in the U.S., you may be offered an opportunity to apply for a credit card “instantly.” How is it that companies can offer credit on the spot? It’s because they use credit scores that predict how likely someone is to pay their bills in the future. Most credit scores are created by a company called Fair Isaac, which creates what are called “FICO” credit scores. To create a credit score, information in credit reports, account histories, or credit applications is evaluated to find out what consumers who pay their bills on time have in common and then they are assigned a number, and that is their credit score. According to Fair Isaac, the factors that make up your credit score fall into five main categories:

Payment history 35%
Amounts you owe 30%
Length of credit history 15%
New credit 10%
Type of credit in use 10%

The most important factors in a score are your payment history and the amounts you owe. If you have few or no credit accounts that have been reported to the credit reporting agencies then you may have no credit score, or your score may be low due to little credit experience. Credit scores usually fall between 350 and 850. A score below 650 is usually considered quite low (risky) and therefore it will be difficult to get credit at the most favorable terms. A score of 650 – 680 is still risky but credit is generally available at less favorable terms. A score of 680 – 720 is better, while a score of 720 and above is usually considered very good. Keep in mind that every creditor has its own policies, and each one may look at the same
score differently. Also, keep in mind that your credit score can be different, depending on which of the three major credit bureaus supplied the information used to create it, what kind of loan is being considered, and what formula each lender uses. Note: Even though Equifax operates in Canada and Experian in England, the foreign credit reporting agencies do not share files with the U.S. You must establish your own credit history here.

Getting Started

Millions of Americans don’t have credit histories because they haven’t established credit with traditional lenders. These consumers may rent their homes or apartments, use checkcashing outlets for payday loans, or buy their furniture and appliances from rent-to-own stores. There are efforts underway to give these consumers some “credit” for paying those kinds of bills on time.

First, Fair Isaac Co., creator of the popular FICO scores (see below) has developed a new credit score based on information from companies that don’t traditionally report to credit reporting agencies. If you haven’t established a credit history with the three major credit bureaus, some lenders will be able to access one of these non-traditional FICO scores. At this time, it is not yet widely used but likely will be in the future. Another new credit-reporting agency, Pay Rent Build Credit (www.PRBC.com) also gathers information about non-traditional credit transactions. PRBC is the first organization ever to help consumers build an accurate bill payment history with rental, utility, and other recurring bill payments. Building your credit history through PRBC is free. Simply visit the website to enroll and learn how to create your credit history.

Getting Your First Credit Card

To get your first credit card, you may need the following:

• Valid Social Security number or Tax Identification number (see below)
• Proof of your address, such as a copy of a utility bill in your name
• Proof of income such as a copy of recent pay stubs or W-2s
• A checking and/or savings account in your name

Every creditor has different requirements, so be sure to ask about the lender’s minimum requirements before you apply.

Students
If you are a college or university student, you may want to apply for a student credit card. These cards typically do not require an established credit history or strong income. Applications are often mailed to students or available on campus.

Social Security numbers
Generally, to get a major credit card or other loans, you will need a valid Social Security number first. You can get a Social Security
number from the Social Security Administration (www.SSA.gov) by filling out form SS-5. You can also visit a local Social Security office. You can usually get a Social Security number as long as you are eligible to work in the U.S. If you are not eligible for a Social Security number, you may
instead want to apply for a Taxpayer Identification Number (TIN) through the Internal Revenue Service (IRS). Visit www.IRS.gov or contact your local IRS office.

Secured Credit Cards
One of the fastest ways to get a credit card and establish a credit history can be a secured credit card. With a secured card, you place a deposit with the issuing institution. You will get a MasterCard or Visa card with a credit line that is usually equal to your deposit. You can use the card anywhere that MasterCard or Visa cards are accepted. Ideally, you should choose a secured card that reports your monthly payment history to all three
major credit-reporting agencies. Visit www.BankRate.com or www.CardRatings.com for a list of secured credit cards.

Tips for Smart Credit Use

• Don’t pay interest on items you don’t really need, or for things that will be gone by the time you get your bill. Otherwise, it’s the opposite of getting a bargain – it is like buying that item marked up instead of marked down!

• Read your credit card agreements and the correspondence you get from issuers. There may be important information in them. For example, credit card issuers can generally change your interest rate with only 15 days written notice – even on a card with a fixed rate.

• Always mail your payments for your credit cards at least 5 business days before the due date. Most credit card companies have steep late payment penalties. In addition, your interest rate on new purchases as well as any current balance may be raised to a very high rate if you are late.

• If you pay your debts late, a late payment will likely to be reported to the major credit bureaus and will stay on your credit report for seven years. Your other credit card issuers may raise your interest rates if they see you are falling behind on other accounts.

• Call the credit card company if you can’t make a monthly payment on time. Ask them about alternative payment arrangements that won’t damage
your credit or raise your interest rate. A credit counseling agency can help you work out a payment plan with your creditors if you having trouble keeping up.

• Notify your credit card issuer 30 days before you move, and don’t assume that just because you didn’t get a bill you don’t have to pay it. If a bill doesn’t arrive, call your card issuer or lender immediately.

• Try to pay off your total balance each month. Just paying the minimum is a trap. If you pay just the minimum of a $1,000 debt on a card with an 18% interest rate, it will take you more than 12 years to repay.

• Aim to keep your debt payments at less than 10% of your income after taxes. If you take home $750 a month, for example, spend no more than $75 a month on credit.

2008 EDITORS CHOICE - BEST STUDENT CREDIT CARDS Best Student Card to Build / Re-Build Credit HSBC Orchard Bank Platinum MasterCard® [Read Review] Best Student PLATINUM Credit Card Bank of America® Student Platinum Plus® Visa [Read Review] Best Student CASH BACK Credit Card Capital One® No Hassle Cash(SM) Rewards for Students [Read Review] Best Student GAS Credit Card Discover® Open Road(SM) Card for Students [Read Review] Best Student REWARDS Credit Card Chase +1(SM) Student MasterCard® [Read Review] Best Student PERSONALIZED Credit Card Discover® Student Card - Monogram Collection [Read Review]