As the holiday shopping season draws near, you may find yourself sifting through credit card offers that arrive in the mail, or sidestepping offers for store credit from clerks. It can be tempting to open a new line of credit to use for holiday shopping. But it can be hard to hold back on spending once you have a credit card in hand. Many Americans who do carry credit card debt owe more than $7,000. And people do not stop at one card. Up to 20 percent of Americans have four or more credit cards.
If you are thinking about a new credit card, weigh your options carefully. When you open a line of credit, you sign a legally binding contract with that creditor. It is important to keep in mind these DOs and DON'Ts before you seal the deal.
1. Review your finances. Make sure you are financially able to pay off any charges you plan to make before you open an account. Take a look at your budget, including income and expenses. Consider your past credit card history. Are you paying high interest on charges on multiple cards because you cannot pay off the balances in full or on time? Or are you able to pay off all charges each month, on time? If this card will only add to your debt load, it may be time to stop juggling plastic and consider meeting with a consumer credit advocate to get your finances in order.
2. Shop around. Lenders, including banks and credit card companies, are very competitive. They want your business. Do not sign up with a company simply because it sent you an offer in the mail. Compare interest rates, fees and offers first. Read the fine print on credit applications. Make sure you understand information about the introductory rate, annual fees and other terms and conditions.
3. Know your credit score. Credit issuers may look at your credit score to determine whether or not you are a good credit risk. A credit score is a number between 300 and 850. It takes into account your past payment history, total outstanding debt, length of credit history, and the types of loans and credit you have. The lower the number, the less likely your chances of securing credit. Most credit card companies want to see scores above 650. If your score is lower, you may pay a higher interest for access to credit. You can get a free copy of your credit report every 12 months from each of the three major credit bureaus. Request yours at AnnualCreditReport.com.
1. Don't get caught up in marketing. Cards that offer rewards like cash back or airline miles are tempting. But these programs may encourage you to spend more to earn rewards. They also often charge higher interest rates and annual fees. Before applying for any credit card, compare rates and fees.
2. Don't apply for multiple lines of credit at once. Every new inquiry to a credit report can affect the credit score. If you are considering making a major purchase such as a car loan, a mortgage or refinancing a loan, that can impact your rate and terms. However, if you are shopping for the best loan you can obtain, as the credit bureaus take this into account and will not count multiple inquiries within a short period of time, for a particular type of loan, against you. In addition, research shows that borrowers are more likely to over-extend and default on payments when they have opened multiple credit lines within a short period of time.
3. Think twice about cancelling other cards. Canceling old accounts that are in good standing can make it appear that your credit history is shorter than it is. This in turn can lower your credit score. Your credit history accounts for 15 percent of your score. Account closures also reduce your "available credit," the unused credit offered on a card – another factor that can lower your score. If you do not want to use a card, store it in a safe place. But leave the account open to strengthen your credit report.
Any time you make a commitment to open a line of credit, it is important to follow through on your end of the deal. Do not miss a payment. Pay the balance in full each month. If that is not possible, pay at least the minimum that is due. Contact your credit card company immediately if you encounter financial hardships and are unable to make a payment. All of these things will keep your credit record in as good standing as possible – and keep your finances and debt load in good health.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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