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Sunday, September 03, 2006

Which credit card is for me?

The UK credit card industry has matured into one of the most lucrative and sophisticated in the world. There are now so many providers and options for customers to choose from that there should be something on the market for pretty much everyone. No matter what your personal circumstances or financial situation, you will most likely be able to find the perfect credit card that fits your conditions.

First of all there are the 0% credit cards. These have sky rocketed in the last number of years. They aim to entice customers with offers of 0% on either balance transfers or purchases or both. Most lenders will be able to provide you with a 0% credit card if you seek one, and meet the qualifying criteria.

Balance transfer cards specialise in giving you a very low, or perhaps zero rate, on balance transfers for somewhere between five and nine months usually. This means that if you were currently paying a lot in interest to your credit card provider, then the balance transfer card would allow you to switch to them and have a period of time in which no interest at all is due.

Cards for those with bad credit also exist. If you have any kind of negative credit history you will probably be aware of the difficulty involved in getting a credit card. Luckily however there are credit card providers that take a flexible approach to credit assessment and may still be willing to lend to you. You charged a higher rate of interest for using one of these credit cards but they do provide a useful means of getting your credit back on track. By meeting your payments on time and in full you can begin the path to improving and repairing your credit history. However, use the card wisely and do not allow it to compound your existing debt problems.

Cash back credit cards are very popular, particularly with those who do not have a difficulty in repaying their credit card in full each month. If you do repay the entire balance on your bill as soon as it arrives, then you will not need a low interest rate, as you do not pay any interest. Therefore signing up to a card that rewards you with cash or some other reward will make sense.

Monday, August 28, 2006

Store Card Versus Credit Card - Which Should You Choose?

Store cards and credit cards have their advantages and disadvantages, but which is best for you. In this article we point out some basics to help you take control of your spending.

Store Cards

Do you have a store card? How many do you have? Do you know how much you are spending on each?

Store cards are a great idea if you use them properly, but they can cause huge amounts of personal financial damage if you don't take control.

When you are offered a store card here a few things to bear in mind:

1. Get very clear on what the offer is exactly. Most stores will offer a card with a promotional deal - say 10% off any purchases that day and for the next week. So what exactly is the offer and how long does it last?
2. Sometimes store cards are heavily pushed during a sale. Again, what's the offer - for example, do you get 10% off sale items too?
3. What are the privileges you get as a store card holder? Do you get a discount every time you shop? Do you get reward points of some kind? Do you get special preview events for new ranges? And what are the details - how many points, how many previews a year?
4. How much credit are they offering you? And can you handle it - or will it make you feel like a kid in a candy store?
5. What are the repayment terms exactly? What's the minimum repayment? What's the APR - during the offer period and after the offer period?
6. Are you bothered? It's easy to take up what seems like a great offer with no effort on your part. But remember you would probably have bought the things you are buying even if there was no store card being waved in your face. Do you really want another piece of plastic, another debt?
7. Can you get the things you want cheaper elsewhere anyway? Most things you usually can do.

Credit Cards

The same kind of questions can be asked about credit cards:

How many do you have? Do you know what you're spending? Are you in control? What are the special offers - low interest, 0% balance transfers, etc? What's the credit limit and can you handle it? What are the repayment terms, including APR?

The major differences from a store card are that you can use a credit card almost anywhere, and that the APR is usually a lot lower. It's also a lot easier to control your spending if it's all on one card.

So when you've weighed up both kinds of card, what should you do? Here's a couple of ideas:

* For general use, have just one credit card. Keep the credit limits low and in control.
* If you are offered a store card and there's an unbeatable opening offer on your purchase, take it. Then, if you can't pay off the debt in one go, use your credit card to pay it off so that you at least get lower interest charges. Next, when your shiny new plastic card arrives, cut it up! Seriously. If you don't destroy it you (or someone in your family) will spend on it and the debt spiral will continue.

Friday, August 04, 2006

Life without credit: tough and expensive

Life without credit: tough and expensive

These days, your credit history can affect everything from insurance coverage to your job application. Here is why it hurts to lack credit, plus some tips for breaking in.

What do you need to get a loan or credit card? A good credit history, of course.

And how do you get a good credit history? By getting a loan or a credit card and paying on time.

Sometimes life can seem like a giant Catch-22, and that’s especially true when it comes to credit, says Maxine Sweet, vice president of public education for Experian, one of the three major credit bureaus. “If you don’t have credit, you can’t get credit,” she says.

Pretty much like the vicious circle of employment: You can’t get a job without experience and you can’t get experience without a job.

But, Sweet explains, you can work your way into the traditional credit system and some lenders will work with you.

There are 20 to 25 million people in the U.S. living without any credit, according to figures from Fair Isaac Corp., the company that pioneered credit scoring. In addition, another 30 million to 35 million have “very little credit on record,” says Craig Watts, public affairs manager for the company.

That’s as many as 60 million people — close to one-fifth of the population — who will have trouble accessing traditional credit.

At the same time, more businesses are looking at credit histories and credit scores. Many insurance companies and employers routinely check credit. So do mortgage and auto lenders. And, these days, apartment complexes and utilities often run checks before accepting new customers.

The young and the newly arrived
So who is living outside the credit system? It’s hard to say because attempts to classify them haven’t been that successful, says Watts. “The data doesn’t match up,” says Watts. In other words, the financial-services industry is having a tough time getting a handle on exactly who is outside the system because they are outside the system.

But credit industry experts agree there are two main groups that comprise the largest segments of the group: the very young (particularly those who have not gone to college) and the immigrant population.

College students are usually bombarded with credit card offers. They often have little or no credit history, yet lenders see them as a decent risk because once they graduate they will likely have strong earning power. But lenders will typically offer them a low line of credit and a very high interest rate.

However, those who don’t attend college could find themselves left out of the credit offers and in danger of falling into the little- or no-credit-history category.

The second vulnerable group is the immigrant population. That’s because credit histories can’t cross international borders. So if you live in Montreal with spotless credit and decide to move to Miami, you’re starting from scratch with no credit history. “The U.S. is not synched up with other international systems,” says Watts.

And there are several other groups that may fall into the no- or low-credit history category:

Retirees. If they’ve gone a long time without using a credit card and the mortgage is paid off, they may have little or no credit history, says Watts.
Older widows and divorcees. If a couple routinely kept the mortgage, bills and credit cards in the husband’s name and he dies or leaves, the woman is starting with a blank slate. But this situation is much less common than it was 30 years ago, according to credit experts. “Most people know to have both names on the account, so that it appears on her history,” says Sweet.

Those who purposely abstain from seeking credit. For some people, the decision to live without credit is voluntary and not an accident or matter of temporary circumstance. “They might have philosophical, political or religious reasons” for living a cash-only life, says Watts.

Those who have managed credit poorly in the past. “Their behavior was so poor that no one will lend them credit,” says Watts.
It’s difficult to make assumptions about income, too. “It tends to be lower — and some middle — income,” says Nick Jacobs, spokesman for the National Foundation for Credit Counseling, an umbrella group of local nonprofit credit counseling services. “There are some middle-income people who just haven’t built up enough of a file yet.”

But some very wealthy individuals are also living without credit. “The very wealthy often don’t have credit,” says Linda Sherry, spokesperson for Consumer Action, a D.C.-based advocacy group. “They have no need for it — they pay for things with their checkbooks.”

The real cost of no credit
Credit histories were originally developed as financial tools to help lenders (usually for mortgages and credit cards) assess whether consumers would pay their debts. Today, credit histories are being used as a screening tool for everything from jobs to insurance rates. Little, no or poor credit can make it more difficult — and in some cases impossible — to get a home, car or even some jobs.

But the biggest cost is financial. Life costs more when you can’t access credit. It’s also harder to do the things most consumers take for granted, like driving to work or throwing in a load of laundry. Without access to normal credit, people either do without items like cars, washing machines and furniture until they can save enough to pay cash, or they obtain them at higher-than-normal rates. Those who can’t pay cash or talk a lender into taking a chance on them sometimes turn to businesses that charge higher-than-retail prices for furniture and electronics, and lenders who offer high interest rates for payday, car tag loans or auto loans.

And it’s a tossup whether no loan or one with a higher interest rate is the worse option for consumers, says Janet Garkey of the Credit Union National Association for Personal Finance. The difference in the rate on a $100,000, 30-year, fixed-rate mortgage for someone with a 520 (poor) score and a consumer with a 720 (borderline good) is 3.45%, says Garkey. That translates to $235 per month in payments and $85,000 over the life of the loan.

Breaking in
Living with no credit can be severely limiting, but there are ways to get into the credit system. Some lenders “will try to work with you,” says Sweet. “But what it means is much more work for you.” And that could include digging up proof of rental payments, old power bills and the like.

One good option: join a credit union. Because of the relationship that is established, it’s easier to get help accessing traditional credit options — and advice on entering the credit game, says Garkey.

Another option: get a secured credit card to start building up a positive credit history. The way it works: You apply for a card and make a deposit that will be equal to your credit limit. You use the card and pay the monthly bills, and the lender keeps your deposit for the life of the card. If all goes well, the lender may issue you a regular credit card after you’ve established a record of good payment. Then you’ll get your deposit back. Consumers sometimes feel a social stigma about having a secured card, says Arnold. But that’s totally unnecessary, he says. “The only people who know the card is secured is you and your bank,” he says. It reports to the credit bureaus “just like a normal credit card,” he adds.

Another option is to get a relative or very close friend to add you as an authorized user on their credit account in good standing. This takes a while longer to establish a history, but it can be very effective. The account holder can either give you access to the account or not, but as long as that account is kept up to date, it will reflect on your future credit history.

If you have some credit history but not much (known as a “thin file”), you might benefit from a lender using a FICO Expansion score. Scaled like a regular FICO score (from 300 to 850), the formula is designed so that the lender can incorporate additional information that might not be in a traditional credit file. For an Expansion score, Fair Isaac will go to “boutique credit repositories” that may have data not traditionally reported (like the payment record from a book or record club), says Watts. The company might also look at how often you use checks or how often you have to access overdraft protection. In addition, if lenders can obtain additional information (like rental payment history or utility payment history), that can also be factored into the formula.

“It’s going to help the people with no credit and it could also help the people with poor credit,” Garkey says. Curtis Arnold, founder of, agrees. “I think it’s a positive thing. With rental histories and power bills you’ve proven that you can pay your bills.”

A relatively new addition to the credit-scoring universe is the VantageScore — introduced as a joint effort by Equifax, Experian and TransUnion — which rivals the FICO score but so far is being used by very few lenders. The VantageScore, which ranges from 500 to 990 and includes A to F ratings as well, is being promoted as paying particular attention to “thin” credit files.

People without credit are “a large segment of our society,” says Arnold. “And the risk is that they are not being judged fairly.”

By Dana Dratch, Dratch is a free-lance writer based in Atlanta.