Friday, January 26, 2007

9 Ways To Avoid Credit Card Pitfalls

1. Be aware that the card issuer has a great deal of leeway. They reserve the right to change the terms of your card, including the APR (annual percentage rate), at any time, for any reason—with as little as 15 days notice. So check your monthly statement carefully.

2. Even if you make your credit-card payments on time, the bank can raise your interest rate automatically if you're late on any other payment elsewhere (such as a water or heating bill, or an outstanding charge on any other account). This is called "universal default."

3. Your credit score—commonly referred to as the FICO score—has become a vital statistic for Americans seeking credit, and can be widely shared. Even if you don't think you have a credit problem, numerous studies—including one by the General Accounting Office—indicate that 70 percent of credit reports have some sort of error! Check your credit report at least once a year—since your credit report is the basis of your all-important credit score, you want it to reflect your true credit history. A free resource:

4. There is no limit on the fee a credit-card company can charge a cardholder for being even an hour late with a payment. That's due to a 1996 U.S. Supreme Court decision (Smiley v. Citibank) that lifted the existing restrictions on late penalty fees. Today, $30 is the most common late fee, according to the Consumer Credit Counseling Service. Ten years ago, that number was $13.

5. There is no federal limit on the interest rate a credit-card company can charge. Take a look at your credit-card statement. Most likely, the return address is located in a states where state governments have weak "usury laws." These usury laws determine whether or not there is a cap on the amount of interest that can be charged on a loan.

6. It's possible to negotiate better terms if your interest rates change or you have received a penalty fee. Always call your card issuer to try to negotiate these terms.

7. Most lenders like a debt payments-to-income ratio with not more than 36 percent of a consumer's gross income, according to the Consumer Credit Counseling Service of Greater Dallas. In other words, for every $1,000 of income, don't have more than $360 going to pay debts. If you exceed this ratio and want more credit or a better interest rate, you'll have to reduce your debt or increase your income.

8. Specialty cards and department-store cards usually have higher interest rates than general-purpose cards like Visa or MasterCard. While they may save you 10 percent on your first purchase, you'll likely end up paying for it in the long run.

9. One late payment can result in a significant drop in your credit score—of up to 100 points—so pay on time every time. A drop in your credit score of just 50 points can mean you pay $100 more a month in your mortgage payment.

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