Getting Credit: What You Need to Know

This article provides tips on shopping for credit cards, using cards carefully, andkeeping your credit record clean. Also explains credit reports andcredit scores, how to protect your identity, improve your creditrecord, and what to do if you are a victim of identity theft.  Agood source of information for people learning about credit.

This information was developed and published by the Federal Trade Commission. Getting Credit: What You Need To Know

The Federal Trade Commission (FTC) is the nation’s consumer protectionchampion. The FTC works for the consumer to prevent fraud, deceptionand unfair business practices in the marketplace. The FTC provides theinformation consumers need to spot and avoid fraud and deception.

WHAT IS CREDIT?

Being out on your own can be fun and exciting, but it also means takingon new financial responsibilities. The decisions you make now about howyou manage your finances and borrow money will affect you in thefuture—for better or worse.

Did you know that there are companies that keep track of whether youpay your debts and if you make payments on time? Then these companiesmake this information available in the form of a credit report andscore.

A bad credit history can haunt you for a long time—seven years or more.That’s why the best thing to do is learn how to maintain good creditbefore there’s a problem. While this might seem complicated at first,it gets easier once you understand the basics of credit and how itworks.

Credit is more than just a plastic card you use to buy things—it isyour financial trustworthiness. Good credit means that your history ofpayments, employment and salary make you a good candidate for a loan,and creditors—those who lend money or services—will be more willing towork with you. Having good credit usually translates into lowerpayments and more ease in borrowing money. Bad credit, however, can bea big problem. It usually results from making payments late orborrowing too much money, and it means that you might have troublegetting a car loan, a credit card, a place to live and, sometimes, ajob.

YOUR CREDIT

Most creditors use credit scoring to evaluate your credit record. Thisinvolves using your credit application and report to get informationabout you, such as your annual income, outstanding debt, bill-payinghistory, and the number and types of accounts you have and how long youhave had them. Potential lenders use your credit score to help predictwhether you are a good risk to repay a loan and make payments on time.

Many people just starting out have no credit history and may find ittough to get a loan or credit card, but establishing a good credithistory is not as difficult as it seems.

You might apply for a credit card issued by a local store, becauselocal businesses are more willing to extend credit to someone with nocredit history. Once you establish a pattern of making your payments ontime, major credit card issuers might be more willing to extend creditto you.
You might apply for a secured credit card. Basically, this cardrequires you to put up the money first and then lets you borrow 50 to100 percent of your account balance.
You might ask other people who have an established credit history toco-sign on an account. By co-signing, the person is agreeing to payback the loan if you don’t.

WHAT A DIFFERENCE A WORD MAKES

Credit card—You can use a credit card to buy things and pay for themover time. But remember, buying with credit is a loan—you have to paythe money back. What’s more, if the credit card company sends you acheck, it’s not a gift. It’s a loan you have to pay back. In additionto the cost of what you bought, you will owe a percentage of what youspent (interest) and sometimes an annual fee.
Charge card—If you use a charge card, you must pay your balance in full when you get your regular statement.

Debit card—This card allows you to access the money in your checking or savings account electronically to make purchases.

THE FINE PRINT

When applying for credit cards, it’s important to shop around. Fees,charges, interest rates and benefits can vary drastically among creditcard issuers. And, in some cases, credit cards might seem like greatdeals until you read the fine print and disclosures. When you’re tryingto find the credit card that’s right for you, look at the:

Annual percentage rate (APR)—The APR is a measure of the cost ofcredit, expressed as a yearly interest rate. Usually, the lower theAPR, the better for you. Be sure to check the fine print to see if youroffer has a time limit. Your APR could be much higher after the initiallimited offer.

Grace period—This is the time between the date of the credit cardpurchase and the date the company starts charging you interest.

Annual fees—Many credit card issuers charge an annual fee for giving you credit, typically $15 to $55.

Transaction fees and other charges—Most creditors charge a fee if youdon’t make a payment on time. Other common credit card fees includethose for cash advances and going beyond the credit limit. Some creditcards charge a flat fee every month, whether you use your card or not.

Customer service—Customer service is something most people don’tconsider, or appreciate, until there’s a problem. Look for a 24-hourtoll-free telephone number.

Other options—Creditors may offer other options for a price, includingdiscounts, rebates and special merchandise offers. If your card is lostor stolen, federal law protects you from owing more than $50 percard—but only if you report that it was lost or stolen within two daysof discovering the loss or theft. Paying for additional protection maynot be a good value.

YOUR PERSONAL FINANCIAL INFORMATION

Banks and other financial companies may share your personal financialinformation with their subsidiaries and other companies. But you canlimit some of that sharing if you want to. “Opting out” can help keepmuch of your financial information private and reduce unsolicitedoffers that come in the mail. But it also means you may not see offersthat could interest you. Your financial institutions will send you aprivacy notice once a year in your statement or as a separate mailing.Be sure to read these notices carefully. Get answers to your questionsfrom these companies. If you decide you want to opt out, follow thecompany’s instructions—you may need to call them, return a form, or goonline. You can shop around for a financial institution with theprivacy policy you want.

DO THE MATH

Keep in mind that credit card interest rates and minimum monthlypayments affect how long it will take to pay off your debt and how muchyou’ll pay for your purchase over time.

Suppose when you’re 22, you charge $1,000 worth of clothes and CDs on a credit card with a 19 percent interest rate.

If you pay $20 every month, you’ll be over 30 by the time you pay off the debt.

You’ll have paid an extra $1,000 in interest. And that’s if you never charge anything else on that card!

KEEP YOUR CREDIT RECORD CLEAN

Good credit is important, now and in the future. In most cases, ittakes seven years for accurate, negative information to be deleted froma credit report. Bankruptcy information takes even longer to bedeleted—10 years.

KNOW WHAT CREDITOR LOOK FOR ON CREDIT REPORTS

Understanding what types of information most creditors evaluate isimportant. Your credit report is a key part of your credit score, butit is not the only factor. You get points for other things like:

Your bill-paying history
How many accounts you have and what kind
Late payments
Longevity of accounts
The unused portions of lines of credit
Collections actions
Outstanding debt
Where to Obtain a Copy of Your Credit Report

Credit reporting agencies don’t share files, so you’ll need to contacteach reporting agency to make sure the information about you iscorrect. The three major credit reporting agencies are:
Equifax
1-800-685-1111
www.equifax.com     Experian
1-888-397-3742
www.experian.com     TransUnion
1-800-888-4213
www.transunion.com
In some states, you don’t have to pay to get a copy of your credit report.

KEEP CREDIT CARDS UNDER CONTROL

Whether you shop online, by telephone or by mail, a credit card canmake buying many things much easier; but when you use a credit card,it’s important to keep track of your spending. Incidental and impulsepurchases add up, and each one you make with a credit card is aseparate loan. When the bill comes, you have to pay what you owe. Owingmore than you can afford to repay can damage your credit rating.

Keeping good records can prevent a lot of headaches, especially ifthere are inaccuracies on your monthly statement. If you notice aproblem, promptly report it to the company that issued the card.Usually the instructions for disputing a charge are on your monthlystatement. If you order by mail, by telephone or online, keep copiesand printouts with details about the transaction.

These details should include the company’s name, address and telephonenumber; the date of your order; a copy of the order form you sent tothe company or a list of the stock codes of the items ordered; theorder confirmation code; the ad or catalog from which you ordered (ifapplicable); any applicable warranties; and the return and refundpolicies.

Finally, if you have a credit card, take the following precautions:

Never lend it to anyone.
Never sign a blank charge slip. Draw lines through blank spaces on charge slips above the total so the amount can’t be changed.
Never put your account number on the outside of an envelope or on a postcard.
Always be cautious about disclosing your account number on thetelephone unless you know the person you’re dealing with represents areputable company.
Always carry only the cards you anticipate using to prevent the possible loss or theft of all your cards or identification.
Always report lost or stolen ATM and credit cards to the card issuersas soon as possible. Follow up with a letter that includes your accountnumber, when you noticed the card was missing, and when you firstreported the loss.

PROTECT YOUR IDENTITY

Identity theft involves someone else using your personal information tocreate fraudulent accounts, charge items to another person’s existingaccounts, or even get a job. You can minimize the risks by managingyour personal information wisely and cautiously. Here are some ways toprotect yourself from identity theft:

Before you reveal any personally identifying information, find out how it will be used and whether it will be shared.
Pay attention to your billing cycles. Follow up with creditors if your bills don’t arrive on time.
Guard your mail from theft. Deposit outgoing mail in post officecollection boxes or at your local post office. Promptly remove mailfrom your mailbox after it has been delivered. If you’re planning to beaway from home and can’t pick up your mail, call the U.S. PostalService toll-free at 1-800-275-8777, or visit www.usps.gov to request avacation hold.
When possible, put passwords on your credit card, bank and phoneaccounts. Avoid using easily available information like your mother’smaiden name, your birth date, the last four digits of your SocialSecurity number or telephone number, or a series of consecutivenumbers. It’s a good idea to keep a list of your credit card issuersand their telephone numbers.
Don’t give out personal information on the telephone, through the mailor over the Internet unless you’ve initiated the contact or you knowwhom you’re dealing with.
Protect personal information in your home. For example, tear or shreddocuments like charge receipts, copies of credit offers andapplications, insurance forms, physician’s statements, discarded bankchecks and statements, and expired credit cards before you throw themaway. Be cautious about leaving personal information in plain view,especially if you have roommates, employ outside help or are havingservice work done.
Find out who has access to your personal information at work and verify that the records are kept in a secure location.
Never carry your Social Security card; leave it in a secure place athome. Give out your Social Security number only when absolutelynecessary.
Order your credit report from each of the three major credit reportingagencies every year to make sure it is accurate and includes only thoseactivities you’ve authorized.
Carry only the identification that you actually need.
What to Do If You re a Victim of Identity Theft

If your cards, bills or identification have been misused to open newaccounts in your name, file a complaint with the Federal TradeCommission. Call toll-free 1-877-ID-THEFT (1-877-438-4338); TDD:202-326-2502, or visit www.consumer.gov/idtheft.
IMPROVE YOUR CREDIT RECORD
A lot of people spend more than they can afford and pay less towardtheir debts than they should. To get control over your finances and tomanage your debt, try:

Budgeting—In many cases, people design and then stick to a budget toget their debt under control. A budget is a plan for how much money youhave and how much money you spend. Sticking to a realistic budgetallows you to pay off your debts and save for the proverbial rainy day.

Credit Counseling—Many universities, military bases, credit unions andhousing authorities operate nonprofit financial counseling programs.Some charge a fee for their services. Creditors may be willing toaccept reduced payments if you’re working with a reputable program tocreate a debt repayment plan. When you choose a credit counselor, besure to ask about fees you will have to pay and what kind of counselingyou’ll receive. A credit counseling organization isn’t necessarilylegitimate just because it says it’s nonprofit. You may want to checkwith the Better Business Bureau for any complaints against a counseloror counseling organization. Visit www.bbbonline.org for your localBetter Business Bureau’s telephone number.

Bankruptcy—Bankruptcy is considered the credit solution of last resort.Unlike negative credit information that stays on a credit report forseven years, bankruptcies stay on a credit report for 10 years.Bankruptcy can make it difficult to rent an apartment, buy a house or acondo, get some types of insurance, get additional credit, and,sometimes, get a job. In some cases, bankruptcy may not be an easilyavailable option.

When to Contact Creditors

If you’re having trouble paying your bills, contact your creditorsimmediately. Tell them why it’s difficult for you, and try to work outa modified plan that reduces your payments to a more manageable level.Don’t wait until your accounts have been turned over to a debtcollector. Take action immediately and keep a detailed record of yourconversations and correspondence.
USE CAUTION
Turning to a business that offers help in solving debt problems mayseem like a reasonable solution when your bills become unmanageable. Becautious. Before you do business with any company, check it out withyour local consumer protection agency or the Better Business Bureau inthe company’s location. One rule to remember is that if a credit repairoffer seems too easy or just too good to be true, it probably is toogood to be true. And knowing your rights can help you steer clear ofrip-offs. For example, according to state and federal laws, companiesthat help people improve their credit rating cannot:

Make false claims about their services.
Charge you until the services are completed.
Perform services until the waiting period has passed. After you signthe written contract, you have three days to change your mind andcancel the services.
Avoid Advance Fee Loan Scams

Offers that guarantee you a credit card for a fee—before you evenapply—are against the law. These scams often target consumers withcredit problems. If someone calls you making that kind of promise, tellthe caller not to call you anymore and hang up.
If you’ve had a problem, the Federal Trade Commission (FTC) works forthe consumer to prevent fraudulent, deceptive and unfair businesspractices in the marketplace and to provide information to helpconsumers spot, stop and avoid them. To file a complaint or to get freeinformation on consumer issues, call toll-free, 1-877-FTC-HELP(1-877-382-4357), or visit www.ftc.gov/ftc/consumer.htm. The FTC entersInternet, telemarketing, identity theft and other fraud-relatedcomplaints into Consumer Sentinel, a secure, online database availableto hundreds of civil and criminal law enforcement agencies in theUnited States and abroad.

It’s a good idea to contact your local consumer protection agency,state attorney general or Better Business Bureau, too. Many attorneysgeneral have toll-free consumer hotlines. To find the number for yourstate’s attorney general, check with your local directory assistance.

BUYER BEWARE!
ADS PROMISING “DEBT RELIEF” ACTUALLY MAY BE OFFERING BANKRUPTCY

As you try to take control of your debt, be on the lookout foradvertisements that offer quick fixes. While ads pitch the promise ofdebt relief, they rarely mention that this relief comes in the form ofbankruptcy. Because bankruptcy stays on your credit report for 10 yearsand hinders your ability to get credit, it’s important to ask fordetails before agreeing to any debt-relief services.
RESOURCES

Federal Trade Commission
Web: www.ftc.gov
Toll-Free: 1-877-FTC-HELP (1-877-382-4357)
TTY: 1-866-653-4261

The FTC works for the consumer to prevent fraudulent, deceptive andunfair business practices in the marketplace and to provide informationto help consumers spot, stop and avoid them. To file a complaint or toget free information on consumer issues, visit www.ftc.gov or calltoll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. TheFTC enters Internet, telemarketing, identity theft and otherfraud-related complaints into Consumer Sentinel, a secure, onlinedatabase available to hundreds of civil and criminal law enforcementagencies in the U.S. and abroad.

FEDERAL TRADE COMMISSION     FOR THE CONSUMER
1-877-FTC-HELP     www.ftc.gov
Identity Theft
Web: www.consumer.gov/idtheft
Toll-Free: 1-877-ID-THEFT (1-877-438-4338)
TDD: 202-326-2502
The FTC is the federal clearinghouse for complaints by victims ofidentity theft. Although the FTC does not have the authority to bringcriminal cases, the FTC assists victims of identity theft by providingthem with information to help them resolve the financial and otherproblems that can result from identity theft.

The JumpStart Coalition for Personal Financial Literacy
Web: www.jumpstartcoalition.org
The Jump$tart Coalition for Personal Financial Literacy seeks toimprove the personal financial literacy of young adults by evaluatingtheir financial literacy; developing, disseminating and encouraging theuse of standards for grades K-12; and promoting the teaching ofpersonal finance.

DON’T BE LOST
A lost or stolen wallet or purse is a gold mine of information for identity thieves. If your wallet or purse is lost or stolen:

File a report with the police immediately and keep a copy.
Cancel your credit cards. Call the issuer(s) immediately. Manycompanies have 24-hour toll-free numbers to deal with such emergencies.The number is on your monthly statement.
Get new cards with new account numbers.
Call the fraud departments of the major credit reporting agencies, and ask each agency to put a “fraud alert” on your account:
Equifax 1-800-525-6285
Experian 1-888-397-3742
TransUnion 1-800-680-7289
Report the loss to the fraud department of the bank where you have yourchecking and savings accounts. Ask about the next steps regarding youraccounts, including your ATM or debit card.
Review your credit reports regularly and have them corrected when necessary.
Report a missing driver’s license to your state department of motor vehicles.
Change your home and car locks, if your keys were taken.
About Lost or Stolen Credit Cards…

If your card is lost or stolen, federal law protects you from owingmore than $50 per card-but only if you report that the card was lost orstolen within two days of discovering the loss or theft. If you suspectany fraudulent purchases, you may be asked to sign a statement underoath that you did not make the purchase(s) in question., it’s importantto ask for details before agreeing to any debt-relief services.
July 2003