or many consumers, credit cards are a "can't live with 'em,
can't live without 'em" proposition. The convenience and buying
power of two little words--charge it--make it all too easy to
rack up a balance you may not be able to pay by month's end.
|But credit cards don't have to be a fiscal catch-22. By understanding how credit card applications arrive at your doorstep and by reading and deciphering each offer's fine print, you'll be better able to recognize the pitfalls as well as the plusses that come with each statement and offer in the mail.|
1. I receive a lot of credit card offers. Does that mean I have good
Not necessarily. Credit card issuers use varying sets of
criteria to determine who receives offers. "Some issuers use
strict criteria and will check your record for past delinquencies
and other negative indicators," says Judy Dahl, communications
manager for Equifax Card Services, Inc. in Madison, Wis. "Others
may not be as diligent about checking your credit history. So an
offer doesn't uniformly mean you're a good credit risk."
Some credit card issuers purposely target customers with less-than-stellar
credit records, or simply no
records. For example, certain companies doggedly pursue college students.
"They love college people because they want to establish brand
loyalty while someone is young," says Andrew Feinberg, author of
"Downsize Your Debt: How To Take Control Of Your Personal
Finances" (ISBN 0-14-013428-X). "They know there is inertia, that
someone will stay with a card until they have a very good reason
to go elsewhere. So if they're in there first, that is a terrific
2. How does a credit card company making me an offer know if I have
An issuer has a credit bureau run a credit check. The company sends a list of names as well as its credit criteria to the bureau. The bureau then applies the criteria to assess a person's credit history and assign a score that indicates an individual's creditworthiness. The issuer uses the scores to determine who receives an offer.
3. Is there a difference between an offer that says I'm already
approved and one that invites me to apply?
Yes. "With an invitation to apply, the issuer looks at demographics and sends out the applications," says Dahl. "They don't do a credit check until they get responses. With a preapproved offer, it means they've already done the prescreening or credit check. By regulation, once they do the prescreening and you pass the criteria, they have to extend an offer."
Dahl points out that many credit unions differ slightly in their approach; they will do some checking even before sending out invitations to apply. Most likely, the candidates already have filled out other credit applications with the credit union, so information is more readily available.
4. Do all card offers show up on my credit report, and could they
affect my ability to get credit?
A credit bureau makes a notation on your credit report every time it's pulled for screening. But that information is available only to the consumer, according to Dahl. In other words, you can see who's prescreening you for offers, but credit issuers cannot. That's to prevent them from using numbers of offers as a prescreen criteria. After all, "You don't ask to be prescreened," Dahl points out, so you shouldn't be penalized for receiving large numbers of offers.
5. If I already have, say, a Visa card, can I accept an offer for
another Visa card from another issuer?
Yes, you can. "You have to watch the total amount of available credit you have out there because that represents your potential to accumulate debt," Dahl says. "But there's nothing saying you can't have more than one."
6. If I accepted all the offers I receive, I'd be a less-attractive
borrower to the issuers--but the offers keep rolling in. Don't
credit card issuers worry that a customer will accept too many
Yes, they do. "If you apply for a certain number of cards--usually six (in general) or maybe three in a shorter time period--it is considered negative by some credit grantors," says Feinberg. "They think you all of a sudden need a lot of credit. They reason that, in one day, you could max out all those credit lines. Then you become a less-desirable credit risk to them." Dahl says issuers do what they can to check out simultaneous applications before they extend credit. But so many issuers process applications at the same time that two issuers may extend offers to the same person and not know they've doubled up.
7. I read that credit card companies were writing off a higher
percentage of bad debt. How does that affect credit card rates?
Rather than raise interest rates, banks and other issuers are instituting new fees to bring in more revenue to cover losses. "According to the banks' research, consumers are less sensitive to fees than high rates," Dahl says. "So late fees and cash-advance fees are increasing. They aren't as apparent and they're easier for the consumer to swallow if they don't notice." Credit unions, on the other hand, tend to charge fewer fees and focus instead on service, Dahl says. Issuers also are recouping revenue by shortening or eliminating grace periods. This means customers pay interest sooner on their balances.
8. Can I consolidate more than one credit card balance onto a new
Absolutely. In fact, card issuers are encouraging transfers by mailing out letter checks or "convenience" checks, which allow you to move your balances to their cards. Sometimes an issuer will offer a short-term lower interest rate as an incentive to transfer.
Remember, though--issuers usually treat convenience checks as cash advances; your new credit card will charge you interest from the moment you cash the checks. And avoid cards that charge a fee for transfers, Feinberg says. Some charge a minimum of $10 or $20 or a percentage of the sum you transfer. We can help you transfer your balances from high-interest rate cards to a credit union card.
9. I received a preapproved offer for a card at a 6% interest rate;
why would I even want to consider other cards at higher rates?
If you read the fine print, you'll see the extremely low "teaser" rate probably is in effect for a limited time, say six months. After that, the rate goes up "often dramatically" to 18% or 19%. "Unless you want to spend time transferring your account balance every six months to take advantage of other teaser rates," Dahl says, "you're better off looking for a reasonable rate that will stay low."
10. I'm considering a rebate card. Is it worth paying an annual fee?
If you stick with one rebate card in order to maximize its benefits, you're more likely to recoup the cost of the annual fee. But if you divide your benefits among several rebate cards-- one for frequent flier miles, one for gasoline, one for credit toward an automobile--you probably won't get your money's worth. The key is not to jump at the first rebate offer you get. "Think each offer through," Feinberg says. "I think rebate cards are a tremendous opportunity for consumers as long as they do it right."
11. I have three cards--one charges 19% annual percentage rate (APR) and I carry a $1,200
balance; one charges 16.5% APR and has a $3,000 balance; and one
charges 18% APR and has a $700 balance. I always pay the minimum,
sometimes a little more. How long will it take me, and how much
will it cost, to pay off those charges if I keep the three cards
and continue to pay just the minimum?
According to Steven Rick, an economist with the Credit Union National Association, Card No. 1, with the $1,200 balance, will cost about $1,757 in interest and take 12 years to pay off. Card No. 2, with a $3,000 balance, will take almost 22 years to pay off at an interest cost of about $5,103. Card No. 3, with the $700 balance, will cost about $300 in interest and will take more than four years to pay off. All told, you'll pay about $7,160 in interest to clear yourself of credit card debt. And that's if you never make another charge using these cards!
12. What could I save by consolidating these into a lower-rate card,
say, charging 14%?
If you consolidate all your debts onto a card with a 14% interest rate, you will pay about $5,969 in interest, says Rick--a savings of almost $1,200. And, you can save even more money if you establish and stick to a time frame for paying off your credit cards. For example, if you set a goal of paying off your credit card--the new one at 14% interest--in five years, you'll pay only $1,940 in interest, a savings of more than $5,200. So smart budgeting can pay off.
|As ironic as it sounds, you should aspire to become a "deadbeat," what Feinberg says is a credit industry term for people who don't carry a balance. Companies make little or no profit from this type of deadbeat. Instead, the money stays where it belongs--in your pocket.|
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