How Fed rate cuts affect your credit card
Fed rate cuts mean that it may be a good idea to shop around for the best credit card interest rate.

Q. When the prime rate and other key rates are falling, does that mean credit card interest rates will decline as well?

A. Generally, yes. Fed rate cuts often translate into better deals for many credit-card holders, said Justin McHenry, research director for Indexcreditcards.com, which compares credit-card features.

On the other hand, a number of credit-card companies have recently raised rates despite the recent rate cuts by the Federal Reserve. This may be in response to the subprime mortgage crisis and unrest in the credit markets. So some credit card holders may have actually seen increases in their rates

Depending on your credit-card agreements, payment history, and credit history, cardholders may find that their interest rates fall automatically after a Fed rate cut. If, for example, your rate is prime plus 4.99 percent, your Annual Percentage Rate, or APR, may fall along with the prime rate.

And you might be able to get an even better deal.

“For a lot of people, this is a good time to either see if they can get a lower rate, or to look around” for other cards charging a lower rate, McHenry said.

Some credit cards have a floor below which rates can’t fall, he said. But it’s cheaper for a credit-card company to keep old customers than to recruit new ones, so many companies are willing to bargain within those limits to keep good customers.

“Your best negotiating point is how good your credit history is and whether you actually could go get another card,” according to McHenry. “You need leverage on your side. The more you know about your credit history, the more leverage you have in asking for something.”

One caution: Your credit could take a slight hit if you close an older account in favor of a new one, especially if you will be close to the credit limit on the new account with a balance transfer.

Tips to raise your credit score
A better credit score can help you get a better loan rate.

Your credit rating can help determine whether you get a loan and what interest rate you pay, so getting your score as high as possible can save you big bucks.

The difference in interest rates for mortgage loans is nothing to sneeze at. Someone with a FICO score, or credit rating, of 760 to 850 could pay $188 less per month on a $216,000 30-year fixed-rate mortgage than someone with a score of under 658, according to MyFICO.com. The amounts are based on interest rates of 5.99 percent for the higher rating and 7.31 percent for the lower rating.

Credit scores are grouped into five basic categories, according to MyFICO.com. In general, about 35 percent of the score is based on your payment history, about 30 percent on how much you owe, 15 percent on the length of your credit history, 10 percent on new credit and 10 percent on types of credit used. The mix can vary depending on your situation.

Credit ratings evolve over years, but there are ways to raise your credit score a few points at a time.

Pay your bills on time.
“I’m not sure a lot of people understand that,” said Jack Guttentag, professor of finance emeritus at the Wharton School at the University of Pennsylvania and the man behind The Mortgage Professor Web site (mtgprofessor.com). “They always say, ‘I always pay it eventually.’ ”

Pay more than the minimum on your credit cards every month.
Your score could go up a few points as your credit card balances go down. Just a few larger payments can help if you previously were paying the minimum.

Limit the number of new credit-card accounts you open.
An exception is for people who are trying to re-establish credit after a bankruptcy or other financial crisis, according to MyFICO.com. “Opening new accounts responsibly and paying them off on time will raise your score in the long term,” says the Web site, which is published by Fair Isaac, the company that invented the FICO score.

Keep your balance well below the credit limit on revolving accounts like credit cards.
Your credit score will likely be higher if you have small balances on four or five credit cards (as an example) than larger balances on two or three cards, especially if the balances are close to the credit limits, Guttentag said.

Pay off any uncollected items.
Your credit score is being hurt if you’re withholding payment because of a dispute with the lender, no matter how “right” you are.

And finally, always remember that paying down your revolving credit, or credit cards, is the best way to improve the portion of your credit score that looks at how much you owe.

3 myths about your FICO® scores
Managing your credit rating can help you become a smarter borrower.

Failing to understand how your FICO® scores are calculated can be costly. Although it’s not the only thing lenders look at, the scores calculated by the nation’s three major credit-rating bureaus can make or break your loan request, or at the very least increase the cost of borrowing.

Yet myths about how these important scores are calculated persist, potentially keeping borrowers from getting higher credit ratings – and lower interest rates.

Here are three myths – and realities — about FICO® scores:

Myth: Closing old or paid-off accounts will increase my score, especially if I open new accounts.
Truth: Old accounts in good standing generally benefit your FICO® score. They show you have a long history of managing credit, particularly if you pay off the balances or keep them low. What’s most important is to stay well below the credit limit, regardless of the age of the account. And be reasonable about the number of credit cards and accounts you maintain.

Myth: My score will go down if I shop around for a loan.
Truth: If you’re shopping for a mortgage or an auto loan, multiple credit inquiries for the same type of loan within 14 days won’t affect your score. The formulas used by the three major credit bureaus recognize you are shopping for the best rate. However, if you’re shopping for a mortgage one month and an auto loan two or three months later, your FICO® score could take a hit.

Myth: I don’t need to check my FICO® scores if I pay my bills on time.
Truth: Credit reports often contain errors that can bring down your score. The only way to know the information is accurate is to check your credit report yourself. You can get one free credit report a year from each of the agencies: Equifax, TransUnion and Experion Group Ltd. Keep in mind that the free credit report does not give you your FICO® score. You can get all three of your FICO scores at www.myfico.com.

Fair Isaac, the company that developed the FICO® score formula, had made changes in 2008 meant to better predict risk. The occasional delinquency will count less, but patterns of delinquency or other problems will count more.

Old formula or new, the basics remain the same. A solid record of paying bills on time and avoiding becoming overextended is your best path to getting and keeping a good FICO® score.

Visit the LendingTree Credit Resource Center for information and tools to help you manage your credit.

What to look for on your credit report
There is a wealth of information listed on your credit report. Here’s how to focus in on key sections and make sense of it all.

You’ve pulled a copy of your credit report and are now looking at a tangle of information. You see your last three addresses, a long list of businesses that have checked your report and dozens of credit accounts. But what does it all mean? Which information should you look at first? Here’s a quick rundown of your credit report and the key information on it.

Why should I care about my credit report anyway?
A credit report is a factual record of your payment history and other credit-related items that lenders use to help determine whether to grant you credit. The information on your report is compiled by the credit bureaus, which regularly receive data on whether you make payments on time and how much you owe. Since creditors are constantly reporting new information to the bureaus, your credit report is always changing.

What should I be looking for?
In a word, inaccuracies. Mistakes are not entirely uncommon on credit reports. Sometimes they’re caused by simple human error, other times they occur when credit files of people with similar names are inadvertently mixed. Increasingly, unfamiliar or inaccurate information can also be an indicator of identity fraud – when someone uses your name and accounts without your knowledge. Look closely at the following areas to catch mistakes or fraud:

• Personal information. Are the names and addresses listed on your report accurate? Often, an incorrect address or unfamiliar suffix, such as Jr. or Sr., can be an indication that your file may have been mixed with that of another person. Additionally, a recent address change may indicate that someone is fraudulently opening accounts in your name, but routing the bills to their address.
• Public records. If any bankruptcies, judgments or liens are listed in this section, make sure they are accurate and complete. Remember, some bankruptcies can stay on your report for up to 10 years while others cycle off after seven years.
• Accounts. You will notice basic information such as your credit limit, current balance and date the account was opened. Also check out the detailed payment information by month for incorrect late payments or charge-offs. Remember to check for unfamiliar accounts or activity on accounts that you thought were closed. Someone besides you could be using the account.
• Inquiries. This section shows you who has received information from your credit report and who was given your name during the recent past, as allowed by law. Often, credit grantors will “pre-screen” your credit file in order to offer you special rates. Additionally, inquiries are recorded when you apply for new credit or authorize an employer or insurance company to check your credit history.

What next?
If everything looks accurate, then you can breathe easy. Just remember to regularly monitor your credit to make sure everything stays accurate.

If you find a mistake, then you have the right to dispute the information free of charge. You should contact the credit bureau that provided the information and dispute the inaccurate information. You can also contact the creditor and ask that new, accurate information be provided to the credit bureau.

Finally, if you suspect fraud, contact the credit bureaus immediately and place a fraud alert on your report. Then, contact your credit card companies and bank to protect your accounts.

This information is provided in partnership with ConsumerInfo.com, an Experian company.

Teaching kids how to use credit cards
New prepaid credit cards for kids can help young people learn how to use plastic wisely.

If there’s one thing that makes parents more nervous than picturing their kids with the car keys, it’s imagining them with a credit card. Yet in recent years, the number of teens using plastic has increased dramatically as credit-card companies actively pursue young people with applications in the mail, at college fairs and especially on campuses, where students get T-shirts and other free gifts for signing up.

Your kids are a target
It’s not surprising that card issuers are targeting teens — kids aged 12 to 17 in the U.S. spent over $100 billion in 2004. And according to a poll conducted by Coinstar Inc., the average teen reports plunking down more than $250 a month. The question for parents is this: Does having a credit card teach a teenager to use credit responsibly, or is it simply the first step toward a lifetime of debt?

The answer lies somewhere in the middle. There’s no question that some college students — like some adults who should know better — use credit cards irresponsibly. So getting a credit card at age 16 and starting with a low limit of $500 or so may indeed help teens learn to budget, and teach them that reckless spending has a high price.

That logic, however, doesn’t always hold up. According to a recent study conducted by the Jump$tart Coalition for Personal Financial Literacy, about a third of high-school students have used a credit card, either belonging to their parents or issued in their own name. Yet when questioned about how credit works, these kids actually scored lower than their peers who had never used plastic.

When teens start asking for a credit card, it’s therefore important to help them understand some basic facts. Here are some practical ways you can help your kids learn how to use credit cards with care.

What they need to know

• Credit cards have higher interest rates than almost any other type of borrowing. This means higher costs. For example, it costs $15 a month to carry a $1,000 purchase on a card with an 18 percent interest rate.
• If they make only the minimum payment each month, their debt will keep growing, even if they don’t make any other purchases.
• If they miss any payments, their credit rating will suffer and they may have trouble getting a loan or apartment lease in the future.

How to help kids learn

• You can order an extra card in your teen’s name and link it to your own account. Any purchases will show up on your statement so you can keep an eye on your teen’s credit card habits. By agreeing on a pre-set spending limit, and holding them responsible for paying off the charges each month, you can help your kids learn how to budget.
• Some credit-card issuers also offer prepaid cards designed specifically for teens, such as Visa Buxx. These cards work much like an allowance: You load them with a fixed amount of cash, and when it’s gone, so is your teen’s spending power. While these cards don’t actually extend credit or charge interest, kids who use them may learn that charge cards are not a license to make unlimited purchases.
• You can suggest that older teens who are earning income and applying for a credit card in their own name ask to have the card linked to their own bank account, so the whole balance is automatically paid off each month. This way they can start building up a good credit rating while avoiding hefty interest charges on an unpaid balance.

The hidden costs of credit cards
Are you paying for things you aren’t aware of? Understand how credit card fees are calculated and save.

Credit cards have become an essential part of everyday life. About 145 million Americans use them, and for almost every kind of purchase. An estimated 40 percent also use them as an easy form of short-term credit, carrying an unpaid balance from month to month. But while card holders may be aware of the relatively high interest rates they’re charged on their balances, they may not be aware of other ways card companies can raise the price they pay for this easy form of credit.

Universal default: A hot topic these days, this is the card issuers’ practice of penalizing you for falling behind on your other credit accounts, even if you haven’t missed a card payment. In some cases, a single late payment to any of your other creditors can trigger the card company to impose a penalty rate, which can be 29 percent or even higher. Reversing the change can be difficult.

Low minimum payments: Low minimum payments may look like a blessing. But even with new guidelines that have recently caused most credit card companies to increase the minimum amount you’re required to pay each month from around 2 to 4 percent, it can often take a long time to pay off your debt, and you can still end up paying thousands in extra interest charges.

“Teaser” rates: Many people choose a credit card based on its low advertised interest rate — in some cases, zero percent. But these rates don’t last. Many disappear after six months, and most are gone after a year, leaving you stuck paying a higher rate.

Changeable rates: Not many of us read the fine print on our cardholder agreements, but it often gives the card issuer the right to change its interest rates and its fees for any reason — and sometimes for no reason. It often needs to give you only 15 days’ notice before bumping up your interest rate or raising its fees.

Varying rate levels: If you make some purchases at a promotional rate and others at the card’s regular rate, the card company often applies your payments to the lower-rate debt first, leaving you paying off the higher-rate debt. This can also occur if you take cash advances that carry a special higher rate.

Fees, fees, fees: Many cards carry a variety of fees you may not discover until you have to pay them. These include application and processing fees, late payment fees, transaction fees, fees for going over your credit limit, overdraft protection fees and balance transfer fees. And some even impose their late fee if your payment arrives after a designated hour on the due date.

You can avoid some of these costs by reading your card agreement, and by paying off your credit card balance every month. If you are in need of long-term credit, one strategy is to consider other, less costly kinds of loans. One option is a home equity loan, which can allow you to borrow money at a considerably better rate than a credit card. In fact, many cardholders use these loans to consolidate their credit card debt.

A home equity loan often carries a lower rate than a regular personal loan. And, the interest is usually tax-deductible up to $100,000, saving you more money. (Consult a tax advisor for advice on how this would apply to your own particular situation.) The amount you can borrow depends on how much equity you have in your home. You can choose a fixed-rate home equity loan to pay off an existing card balance, or a home equity line of credit (HELOC) to cover occasional costs instead of using your credit card.

Another option is cash-out mortgage refinancing: you refinance your home for more than you currently owe, and take the difference in cash. You can use this money to pay off your credit card balance, or to cover expenses that would have gone on the card. The new debt is paid off at your mortgage rate — likely much lower than the credit card rate.

Either way, these loans can provide affordable credit — without a credit card’s extra costs.

Student loans and your credit rating
How you handle your student loans will have an effect on your credit rating for years to come.

With college tuitions rising by up to ten percent in 2004 alone, you may be thinking of taking on a student loan to help with the finances.

Your student loan will likely be the largest debt you’ve ever had — possibly also the first. How you handle your student loan can have a huge effect on your credit rating and, since your credit rating determines how much you can borrow for years to come, your financial future.

Your credit rating reflects the debts that you have and your repayment history. The key to a good credit rating is to make regular payments on time and pay off your debt as quickly as possible. With careful planning and financial responsibility, you won’t feel overwhelmed by your student loan. Here are a few tips to help you effectively manage your debt.

Make interest payments
If you have obtained an unsubsidized government or bank loan, you may have to make interest payments while you are still in school. Factor this amount into your monthly budget and make payments on time.

You may have the option to defer the interest payments, adding them to the principal amount due after graduation, but try to avoid this. The interest will add up quicker than you think.

Use the grace period
Upon graduation, you usually have a six- to 12-month grace period before you start repaying your loan. This time is designed for you to find a job that affords you some financial stability. If you get a job before your grace period is up, put some money aside and make a large payment into your loan to start off on the right foot.

Pay it off as soon as possible
Most student loans give you 10 years to repay. The monthly payment that your lender requires is based on this timeline. If you can afford it, increase your monthly payment and pay your loan off sooner. Also, if you get a tax refund or bonus check, use it to make an extra payment toward your principal.

By paying more than the minimum payment, you will reduce your debt and pay off your loan faster. Not only will this lower the total interest you pay over the life of your loan, it will have a positive effect on your credit score.

One caveat: Interest rates for student loans are usually lower than for other types of debt. If you are carrying a significant amount of more expensive debt, such as from credit cards, put the extra payments toward that debt first. You’ll save money on interest in the long run.

Don’t skip payments
Contact your lender immediately if you’re having trouble making your loan payments. By communicating with your lender, you show a desire to cooperate, which makes lenders more willing to work with you to find a solution. You may be able to arrange an alternative repayment plan with lower payments and a longer-term loan. You may also be able to defer payments for a few months, but remember your loan may continue to accrue interest.

If you can’t afford to pay the full amount, make a smaller payment to show a good faith effort. If you skip payments, your loan will be considered delinquent. This will show up as a negative mark on your credit report.

When you repay the loan, your credit rating should improve, but your missed payments will still be on your record.

Never default
Defaulting on your student loan can leave a stain on your credit history for up to seven years after your loan is paid in full. When you default, collectors will hound you for payments and may eventually seek legal action. Your lender can garnishee your wages and your tax refunds in order to repay the loan.

If you declare bankruptcy, keep in mind that your student loans are not always forgiven. Government loans may still have to be repaid. A bankruptcy also remains on your credit report for seven to 10 years.

As with any money you owe — be it a credit card balance, a student loan or a mortgage — your best bet is to make regular payments and try to pay the balance off as quickly as possible. Not only will this improve your credit score, but you’ll also sleep better knowing the debt is off your shoulders.