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Credit Cards


Credit cards are the easiest form of credit to get. A credit card is a plastic card, issued by a financial institution, that allows you to make purchases or to get cash from ATMs. Most credit card companies charge a separate fee or percentage rate for cash withdrawals. Each credit card is attached to a revolving line of credit that you have with the issuing financial institution. You can make purchases on your credit card up to the credit limit set by your financial institution. The financial institution will pay merchant for the goods/services you have purchased or for the cash withdrawn and will charge you interest for the money you borrow each month. You, in turn, will pay the financial institution monthly.

Credit cards are called revolving lines of credit because the balance fluctuates (up or down) according to how much you borrow, how much you pay, and how much interest is assessed each month, and because there is not a set number of payments to satisfy the debt. The financial institution, usually a bank, will add the interest to the balance on the account.

Credit card interest can be calculated in several ways. In general, banks compute the amount of interest due based on your average balance during a billing cycle, which vary between 20-25 days depending on the credit card company. The most popular method for calculating interest is the two cycle average daily balance method. Using this method, the financial institution calculates the average daily balance by adding each day's ending balance and then dividing that total by the number of days in the billing cycle. The catch is that the financial institution will look back to the previous month as well as the current balance when performing this calculation. Then, this average is multiplied by the monthly periodic rate, which is calculated by dividing the annual percentage rate (APR: the percent of interest you are charged for using the credit card) by 12. In effect, what the financial institution is doing is using an average for two months rather than just one month to calculate interest. The result is the interest assessed is higher than if just a one month average were used.

If you pay your balance off in full each month, most credit cards will not charge you interest. So, it is best to pay your balance off in-full every month. The average person does not pay off his/her monthly balance, however, and is charged interest. A good rule of thumb is to avoid making purchases with a credit card that you cannot afford to pay off in full in 2-3 months.

Establishing New Credit

If you have never had credit or need to make a fresh start with your credit history, you might have some difficulty trying to get approved for a credit card. Lenders assess your creditworthiness largely on your past credit history. If you have no history or a history that you wish were not yours, it is possible that a lender will decide that you are a bad risk and refuse to extend credit to you. However, there are strategies you can use to improve your odds of getting credit. The key is to understand what different types of credit are available to you and to apply for types of credit that are good starters for those with no credit history or a history of marred credit.

If you have no credit, apply for a department store credit card. These cards typically have lower credit limits and are easier to get. Going to college will also make it easier. Many credit card companies actively solicit student accounts. They do this because they know that college-educated people tend to have higher incomes than those without degrees. Apply for a credit card while you are in school. Many of the credit card offers students receive have higher than average interest rates. Use the student card for a while (making sure to pay off your debt each month!), and then apply for a lower interest rate card after you have established a good credit history.

Your income is also a factor in getting credit. The higher your income is, the easier it is to get credit. So, work to develop a good career plan and maintain a consistent work history and you will have an easier time getting credit.

If these strategies fail, some people will opt to have a co-signer help them get a line of credit. This is a very bad idea. Lines of credit that were established with a co-signer will not help you if you are credit-challenged or have no credit. The credit reporting will be for the co-signer, the person who already has good credit, not you the credit-challenged. Conversely, if you miss a payment, the co-signers credit will be hurt, which will inevitably put a strain on your relationship.

Secured Credit Cards

A better plan to get credit is to apply for a secured credit card. A secured credit card is much like a traditional credit card except the credit limit is initially determined by the amount of money the cardholder places on deposit to establish the account. For example, you are approved for a secured credit card and you give the lender a $500 deposit. Your credit line would be equal to your deposit of $500. After making on-time payments for some period of time time, you may earn a credit limit that is higher than the amount of your deposit. Typically the deposit is credited back to your account after a year or so provided that you have a good payment history. As always there is a downside. Secured credit cards generally have a high interest rate. But, remember these cards are often the last resort for the credit challenged. The upside is that credit card companies that offer secured credit cards will usually report to the credit bureaus. So, you can use such cards to re-establish (or establish for the first time) a good credit history.