When you apply for a credit card, you choose the kind of credit you want:

• Individual credit is based on your assets, income and credit history only. You alone are responsible for paying the bills.
• Joint credit is based on the assets, income and credit history of both people who apply. Married couples often apply for joint credit. You may obtain more credit this way, but you'll both be responsible for the debt - even if you get divorced.

An additional person may be authorized to use your account. However, you (and your joint account holder, if any) remain responsible.

When you are approved for credit, the Card Company or issuer puts a credit limit on your account. This is the maximum balance you can carry on your card. Your credit limit helps keep your credit card charges at a level you can pay. Each card issuer has its own standards for setting credit limits. Some factors that may affect their decision are:

• Your monthly income
• Current debt (other credit card lines, car loans,  student loans, etc.)
• Length of residence at your current address
• Home ownership
• Number of times you've applied for credit

 You may ask your card company to increase your credit limit. The answer will depend on your total financial picture. You may qualify for a higher credit limit if certain things are taking place. These are: you always pay on time, your income has increased or your debts have decreased, you always pay more than the minimum due, or pay your balance in full.

• Balance: Your total account debt as of the statement date. It includes any unpaid balance from last month; new purchases since the closing date of your last statement, and any cash advances you may have taken. The Card Company will also add in any other charges such as an annual fee, finance charges and other fees.
• Minimum payment: The smallest amount of your balance you can pay by the due date and still meet the terms of your card agreement. Some people think that the minimum payment is the only amount you owe. Not true. You actually owe the full balance. You'll owe interest on the portion of the balance that you don't pay.

• Average daily balance – Most credit card companies use this method. The card company totals your balance each day during the billing period, adds these daily balances together and divides by the number of days in the billing period.
• Adjusted balance – The Card Company subtracts payments you make during the billing period from your balance at the beginning of that period. This means your balance is kept lower and you pay less in finance charges.
• Previous balance – This method applies the monthly finance charge to your beginning balance for the billing period. Purchases and payments during the month aren't included.
• Ending balance – The Card Company may use your ending balance for the billing period. If so, any purchases and payments during the billing period are included.

• Credit card issuing is a big money business and they make their money in several ways. First, the cardholder pays interest on the revolving loan if a credit card balance isn’t paid in full each month. Second, the card issuer may make a percentage of each item you purchase from the merchant who accepts your credit card. These rates usually range from 1% to 4% of each purchase. The card issuer can also make money off certain annual fees, but these are usually used to defray certain expenses. Last, the cardholder can make additional money through other means, such as selling your name to a mailing list or sending advertisements in your monthly bill.
• Student credit card issuers accumulate many expenses that the average consumer may not have considered. They pass those expenses along to cardholders through interest rates, annual fees and late charges. The biggest expense or risk student credit card issuers face is the loss of money lent to other cardholders. Because most student credit cardsare unsecured, if a person decides to default on their debt, there is little a credit card issuer can do to get their money back. Often its more expensive to try to collect the money than write off the bad debt.
• Credit card issuers have to justify the risk of issuing credit by collecting at least as much interest as they could make investing in bonds, speculative investments, or other securities. Because of the risk of loaning money via a credit card, you may notice that credit card issuers typically charge higher interest than regular loans. Most credit card consumers, however, feel the higher interest is worth the convenience and flexibility of using a credit card.

When a person applies for a credit card, the card issuer does preliminary checking to determine how risky it is to loan that person money. Each card has a standard of risk that the issuer is willing to accept.

Risk is often calculated by each credit card issuer differently through certain rating formulas. Most of these formulas, however, use the same basic information to determine the likelihood of paying the credit card bill. This information includes:

• The applicants credit history
• The applicants income
• The applicants current debt load
• The applicants amount of time on the job
• Whether the applicant owns or rents his  or her home
• How long the applicant has lived at his or her residence
• Number of times the applicant has recently applied for credit

Much of this information is taken from the applicants credit report on file with one or more credit bureaus. When this information is typed in with the applicant’s application, a computer calculates the score and decides whether he or she meets the credit cards standard of acceptance. The applicant is either approved or denied.

All credit cards vary in their standards of acceptable risk. Today, there are so many credit cards, with so many different standards, that there is almost a card for anyone. The higher the risk the applicant however, the less credit normally received and the higher interest paid for that credit. Some credit cards may even want a security deposit down to guarantee their investment in you. That is known as a secured credit card.

To qualify for a specific credit card, you should do your best to understand what level of risk the credit card issuer is willing to accept before you actually apply. It is not always in your best interest to apply for the card first because numerous applications signal credit issuer checks on your credit with the credit bureaus. These numerous checks in a short period of time can cause you to be denied. This seems rather unfair but it is the truth. It is therefore best to get a general idea if you are qualified for a credit card before you submit an application. Some higher-risk credit card companies publish their requirements. Most companies, however, do not. It is important that the applicant looks into these requirements and selects those that best fit his or her needs and profile. In the final analysis, however, there is no way to tell until you apply.

Most credit cards are unsecured, meaning that the credit line is not connected to anything valuable such as a home or car. If the cardholder decides to stop paying on an unsecured credit card, typically, the credit card issuer cannot take his or her home or property. The credit card issuer can sue the cardholder for the debt, and even garnish his or her wages, but the unsecured card agreement doesn’t give them rights to the cardholders’ property. Plus, if the cardholder declares bankruptcy, the credit card issuer will not likely get their money back.

A secured credit card is guaranteed against something of value. This is almost always an amount of money kept in a savings account or held by the credit card issuer. A cardholder usually pays an amount up front to the credit issuer for the use of a limited credit. The deposit is held by the credit card issuer as a way to reduce the risk of extending credit to people with credit problems.

Sometimes that limit is the same amount that was paid to secure the card. This type of fully secured credit card is offered as a way to build credit. Many secured credit cards are only partially secured. The cardholder usually pays a certain amount of money and the credit card issuer provides a credit limit that may be two or three times the amount of the deposit.

Secured credit cards do help to build good credit. But, the card will usually show up on a credit report as a secured line of credit. This is not as good as an unsecured credit line as far as a credit rating. Unsecured credit cards are better then no credit cards, however, to establish or build credit.

Most secured credit cards have annual fees. This is just another way for the card issuer to reduce their risk.

As with all credit cards, you should pay special attention to the interest rate of the secured card.

There are some secured credit cards that will convert to fully unsecured credit cards after the card has been properly managed for an extended period of time. These are good for reestablishing credit ratings.

Beware of secured or unsecured credit cards with easy qualifications that offer unusually restricted credit lines. Some of these cards will only allow purchases from the issuer’s special catalog, or monthly payments must be paid to receive the card and benefits.

• Keep your own checking account and savings account
• Get a copy of your credit report (see below)
• Establish a credit card in your own name. Most college students at four year schools are approved easily.
• Pay bills before the due date
• Know how a loan officer looks at your credit report

To find out what the credit bureaus have compiled on you, you can write them at:Experian (formerly TRW) National Consumer Assistance Center For a free report, call 1-800-682-7654 or write them at P.O. Box 2104
Allen, TX 75013-2104

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Trans Union Consumer Relations - For a copy of your report call 1-800-851-2674 or write
Consumer Relations Division
P.O. Box 390
Springfield, PA 19064-0390 (There is a processing fee.)

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Equifax Credit Information Services - For a copy of your report call 1-800-685-1111 or write
P.O. Box 740241
Atlanta, GA 30374-0241(There is a processing fee.)

The "Fair Credit Reporting Act" protects you from incorrect information hurting you. If you find that you are getting turned down for credit and think that there's something fishy, you should get a copy of your report. You have the right to challenge incorrect information.

Receiving a credit card and using it wisely can be one of the greatest steps in building good solid credit. You can avoid the common pitfalls very easily if you plan your use of the card and act responsibly. Up to now, a credit card has been something that you should fear because of the problems it might cause. But, if you use it correctly, you can turn it into a tool. According to Gerri Detwiler, author of the "Ultimate Credit Handbook", a visa/MasterCard is the best indicator for loan officers how credit worthy an individual is. Turn this into your advantage by making your credit card a tool to show loan officers you pay on time with regularity.

Here's a list of tips to use your card as a tool to build solid responsible credit:

• Use your card every month to make small purchases and pay off the entire amount
• Use your card instead of writing checks - you'll get credit making numerous payments on time. Credit cards, unlike checks, get recorded in your credit report.
• Increase your credit line by showing your responsibility.
• Pay your bill before the "due date"

Your goal here is to get a card in your own name and make the account look active. Doing so consistently will make your credit report look better. Obviously, you want to make sure that you pay on time while you are activating your account.  Some methods to help you do so include:

• Getting your bill mailed to the correct address
• Making sure that your bill is getting to you
• Keeping your bill in a separate folder from your "biology" notes
• Staying organized
• Writing the payment check right away and mail it

Most of these recommendations will help you avoid the typical pitfalls students fall into.

Students have made some very popular mistakes that you can avoid. Some may seem funny but others are very serious. This section shows you what those mistakes are and how to avoid them

Overspending - This is the problem that is most feared. There are nightmare stories abound of students going on spending sprees only to later realize that they have no way of paying the bill. This can be avoided by budgeting your credit card expenditures much like you do your checkbook or cash allowances. Only spend what you can afford to pay each month and leave yourself plenty of room in case of emergencies.

Overborrowing - don't let the tide of unpaid interest swallow you up. Keep your balance manageable.

Poor organization-

• Lost bills
• Forgotten bills
• Bills that go to the wrong address
• Roomate throws the bill away because it looks like credit card junk mail

Here are some common misperceptions of credit cards. We’re listing them so you can avoid making any mistakes

1. "25 day grace period" -Most people in general believe that there is always 25 days of grace before you are charged interest. This is the case only when you have ZERO balance. When you do have a balance, interest is immediately accrued from the moment you charge something to your credit card.

A

Affinity Credit Card:A card that is offered jointly by two organizations. One is a credit card issuer and the other is a professional association, special interest group or other non-bank company. For example American Express sponsors the Delta SkyMiles card.

Annual Fee:The yearly cost to use a credit card. Not all credit cards have an annual fee.

Annual Percentage Rate (APR):The cost of carrying a balance on a loan expressed as an annual percentage. To calculate the amount owed in interest each month divide the APR by 12. For example, if the APR is 18% the monthly rate is 1.5%.

Asset (Financial):Anything owned by an individual that has a cash value. This includes property, goods, savings or investments.

Available Credit:The unused portion of a credit line. Available credit is the credit limit minus the current balance.

Average Daily Balance:The average daily balance is a method used to calculate finance charges. It is calculated by adding the outstanding balance on each day in the billing period, and dividing that total by the number of days in the billing period. The calculation includes new purchases and payments.

B

Bad Credit:A term used to describe a poor credit rating. Common practices that can damage a credit rating include making late payments, skipping payments, exceeding card limits or declaring bankruptcy. "Bad Credit" can result in being denied credit.

Balance/Amount I Owe:The total amount of money owed. It includes any unpaid balance from the previous months, new purchases, cash advances, and any charges such as an annual fee, late fee or interest. The "Amount I Owe" should not be confused with the monthly payment (the minimum payment allowed each month).

Balance Transfer:Moving outstanding balances from one credit card to another.

Bankruptcy:Bankruptcy is a legal declaration of the inability to repay debts. Bankruptcy should be viewed as a last resort. It will have a severe impact on a credit rating and will remain on a credit report for ten years. Furthermore, bankruptcy is not a solution in all cases. Federal student loans, Federal tax debt and child support are all exempt from bankruptcy protection. Bankruptcy agreements vary but there are two types of agreements that most people choose: Chapter 7 and Chapter 13.

Chapter 7: In a Chapter 7 agreement, the court resolves most debts by selling assets and property so that the filer is given a fresh financial start. The court takes all assets including cars, homes, furnishings, jewelry or anything else of value. The assets are sold to pay off the debt.•There are some debts that a person may wish to repay on their own instead of having the court resolve it. This is called reaffirmation. Reaffirmation is a special payment plan with the court. For example, if a car loan is reaffirmed, the person keeps the car and makes payments under new terms.•Chapter 7 bankruptcy will not eliminate debts due to taxes, child support, alimony, student loans, court fines or personal injury caused by driving drunk or under the influence of drugs.A Chapter 7 filing will remain on a credit report for 10 years.

Chapter 13: In a Chapter 13 agreement, the court creates a debt repayment plan that allows the filer to keep their property. •In order to file Chapter 13, a person must have a source of income and promise to pay part of their income to creditors. The court allows the filer to keep any assets that have debts against them if they pay them off under terms determined by the court.•A Chapter 13 filing will remain on a credit report for 10 years. With Chapter 13, there is a better chance of obtaining future loans and credit.

Billing Cycle:The number of days between the last statement date and the current statement date.

Billing Statement:The monthly bill from a credit card issuer that describes and summarizes the activity on an account. A billing statement includes the outstanding balance, purchases, payments, credits, finance charges and other transactions for the month.

Borrower:The person who signs and agrees to the terms of a promissory note and is responsible for repaying a loan.

Budget:A report of estimated income and expenses.

C

Cardholder Agreement: The issuer's written statement of terms and conditions relating to a credit card account. The cardholder agreement is required by Federal Reserve regulations. The agreement states the annual percentage rate, the monthly minimum payment formula, annual fee, if applicable, and the cardholder's rights in billing disputes.

Cash Advance: An instant loan from a credit card account. The Card Company will charge interest from the day the advance is taken until the day it is paid off. A transaction fee may also be charged based on the amount of the withdrawal.

Cash Advance Fee: A one-time fee for cash advances in addition to normal interest charges. This fee is usually a percentage of the advance amount.

CCCS - Consumer Credit Counseling Service:A non-profit organization that provides free or low cost counseling and guidance to people experiencing financial difficulty. CCCS can be reached by calling 1-800-388-CCCS.

Charge Card: A card that requires full payment of the balance by the due date. It is not a line of credit and interest is not charged. The American Express card and Diners Club card are examples of charge cards. The entire balance (what you have charged on the card for the past month) is due in full when the bill comes due. With a CREDIT CARD, you carry a balance and make monthly payments over time.

Collateral: An asset pledged to a lender to guarantee repayment of a loan. Collateral can include savings, bonds, insurance policies, jewelry, property or other items of value. If payments are not made according to the contract, the lender is authorized to take the collateral as payment.

Consolidation Loan:A loan used to refinance existing debt. It usually results in a lower monthly payment at a lower interest rate.

Co-signer:A person who signs a loan or credit card agreement with the primary applicant. The co-signer is responsible for repaying the balance of the loan or debt in the event that the applicant does not.

Credit Card Debt:The total unpaid balances on all credit cards (not to be confused with the minimum amount due each month).

Credit History:Credit history is a record of the way people manage their debts. This information is collected and sold by credit reporting agencies. It includes personal information such as Social Security number, current and prior addresses, and employment information. It also includes the names of credit issuers, current account balances, and the timeliness of payments. Information such as missed or late payments will remain in a credit history for seven years. Bankruptcy will remain for 10 years.The information in a person's credit history can either qualify or disqualify them from obtaining credit cards, mortgages, loans, car or apartment leases, and possibly employment.

Credit Limit:The maximum amount that a person may owe on a credit card, including purchases, cash advances, finance charges and fees.

Credit Line:A revolving amount of credit. Any amount up to the limit on the credit line may be borrowed to make purchases or cash advances. The cost of the purchase, plus interest, is then paid off over a period of time. As the outstanding balance is paid off, credit becomes available again to use for another purchase or cash advance.

Credit Management:The way a person handles the money they borrow from banks or credit issuers. Paying more than the minimum due and not exceeding the credit limit are examples of good credit management.

Credit Reporting Agency (credit bureau): A credit reporting agency is a company that collects and sells information about how people manage their debts. There are three major reporting agencies:

CREDIT REPORTING AGENCIES
Equifax Credit Information Services
P.O. Box 740241
Atlanta, GA 30374-0241
800-685-1111
m
Experian (Formerly TRW)
P.O. Box 2104
Allen, TX 75013-2104
888- EXPERIAN (397-3742)
http://www.experian.com
Trans Union Corporation
Consumer Relations Division
P.O. Box 390
Springfield, PA 19064-0390
800-888-4213

D

Debit Card:A card that allows purchases to be paid for with funds that are immediately deducted from the purchaser's financial account (e.g., checking account).

Debt: The amount of money a person owes to banks and credit issuers.

Credit Analysis (also known as Debt Burden): The percentage of income that goes to paying debt every month. It usually gives a clear picture of overall financial well being. To calculate your percentage, go to the Credit Analysis Calculator.

A low ratio is under 20%, which means that the person is in good financial health and is doing a good job of managing finances. •A moderate ratio is between 21% and 40%. This may mean that the person should look carefully at their monthly payments and expenses and start decreasing their overall level of debt, including credit cards. •A high ratio is over 40%. This may mean that the person should immediately stop accumulating debt and start looking for ways to decrease total debt level.

Default:Failure to repay a loan according to the agreed terms. If a person defaults on a loan, the issuer can sue to ask the court to force the person to pay the balance of the debt.

Deferred Payment:Payments put off to a future date or extended over a period of time. Interest will usually accumulate during deferment.

Delinquent Account:An account on which payments have not been made according to the terms and conditions of the cardholder agreement.

Due Date:The day a payment is due to a creditor. After that date, a late fee may be charged, a late payment may be reported to the credit reporting agencies, and the account may be considered delinquent. 

F

Finance Charges:The total dollar amount paid to use credit. Finance charges include interest, service and transaction fees, premiums paid for credit life insurance, and so forth.

Finance Company:A business that makes consumer loans, often to consumers who cannot qualify for credit at a credit union or bank. Typically the interest rates charged by a finance company are higher than those charged by other creditors.

Fixed Expenses:Expenses that must be paid every month. These are expenses that really can't be changed, like a mortgage, rent, car payment or student loan payments.

Fixed Interest Rate:An interest rate that changes only if the issuer notifies cardholders through an amended cardholder agreement. Federal law stipulates a minimum of 15 day's advance notice is required.

Forbearance:A method of postponing payments due to economic hardship. A lender will set the terms of a forbearance. Typically, interest accrues and is added to the loan balance at the end of the forbearance period.

G

Grace Period:If individuals do NOT have an outstanding balance on their credit card, a grace period is the interest-free time period between the date of purchase and when that purchase appears on their statement. For example, if they pay off the balance in full on June 1st and then buy an item on June 2nd, they will not be charged interest for the time period between June 2nd and their next statement date.If they carry a balance on their credit card from month to month, they do not have a grace period.A grace period is not the amount of time after the due date during which a person may make a payment without being charged a late fee. Payments must be received on or before the due date on the statement.

H

Household Income:The total income of all members of a household. It includes wages, commissions, bonuses, alimony, child support, Social Security/retirement benefits, unemployment compensation or disability, dividends and interest.

I

Individual Credit:Individual credit is credit based on your assets, income and credit history. You alone are responsible for paying an individual account, even if you're married.

Installment Loan:A loan that a person promises to pay back in fixed, scheduled payments over a specific period of time. In addition to the original amount borrowed, interest is paid - a fee for the use of the lender's money. Student loans, home equity loans and auto loans are usually installment loans.

Interest Rate:A fee charged for money lent.

J

Joint Credit:Joint credit is credit based on the assets, income and credit history of both people who apply. Your combined resources may help you get a higher line of credit. But it also means that you both are responsible for paying off the debt. If one person fails to pay a joint account, the creditor can require payment from the other even if you are separated or divorced.

L

Late Payment:A payment that is received after the due date.

Late Payment Fee:A fee charged when a payment is received after the due date.

Legal Judgment:A court decision that may require a person to do something, such as pay a debt.

Liability:Anything that is owed and must be repaid at some point in the future. A liability may be due immediately (such as an electric bill) or may be more long term and be paid off over several months or years (such as a mortgage or student loan). The opposite of a liability is an Asset.

M

Minimum Monthly Payment/Amount Due:The smallest amount that can be paid by the due date and still meet the terms of the cardholder agreement. See also Balance/Amount I Owe.

N

NFCC - National Foundation for Consumer Credit: A non-profit organization dedicated to educating consumers in the wise use of credit. The NFCC is the parent group for Consumer Credit Counseling Service.

O

Outstanding Balance:The total amount owed on a credit card or other loan.

Over-the-Credit-Limit:When the amount owed is greater than the limit on a credit line. Any combination of purchases, cash advances, fees or finance charges may cause an individual to exceed their credit limit.

Over-the-Limit Fee:A fee charged for exceeding the assigned credit limit on a credit card.

P

Past Due:The status of an account when the minimum payment has not been received by the due date.

Periodic Rate:The interest rate described in relation to a specific amount of time. For example, the monthly periodic rate is the cost of credit per month; the daily periodic rate is the cost of credit per day.

Posting Date:The date that a purchase, cash advance, fee, service charge or payment is recorded on an account.

Prepayment:When a portion or the entire amount of the principal of a loan is paid before it is due. This will usually reduce the total amount of interest that must be paid.

Previous Balance: The total balance due at the end of the last billing cycle.

Prime Rate:The base interest rate on corporate loans posted by at least 75% of the nations' 30 largest banks. The Prime Rate is monitored by the Federal Reserve.

Principal:Principal is the portion of a loan that represents the actual amount of money borrowed. Principal is separate from interest. In terms of credit cards, principal represents the price of purchased items or the amount of a cash advance.

Promissory Note:The binding legal document that a person signs to obtain a loan. It lists rights and responsibilities under the loan agreement, including how and when the loan must be repaid.

Q

Quarterly: Every three months.

R

Rebate Card:A credit card that supplies benefits based upon the card's usage. Benefits are usually in the form of services, such as airline tickets, discounts on future purchases or cash refunds. The credits accumulated toward these benefits are often a percentage of each purchase.

Revolving Credit: A credit agreement that allows consumers to pay all or part of the outstanding balance on a loan or credit card. As the balance is paid off, credit becomes available again to use for another purchase or cash advance.

S

Secured Card: A credit card which is guaranteed by a cash deposit held in a special savings account or certificate of deposit. The credit line on the card is usually equal to the amount of the deposit. If the cardholder defaults on payments, the issuer will apply the deposit toward the outstanding balance. The deposit must remain in the account until the credit line is closed or the issuer determines security is no longer necessary.

Secured Debt: Debt for which repayment is guaranteed through collateral - property of equal or greater value than the amount of the loan. If the loan is not repaid, the issuer may take possession of the collateral. Collateral may be an asset such as a car or a home or, in the case of a secured credit card, a cash deposit held by the issuer. For example, a mortgage is a secured debt in which the home is collateral. If the person fails to repay the loan, the bank may take the home as payment.

Semi-Annually: Twice a year.

T

Transaction Date:The date a purchase is made or cash is withdrawn. Some companies assess interest from the transaction date, others from the posting date.

Transaction Fee:A charge for various credit activities such as using an ATM or receiving a cash advance.

U

Unsecured Credit Card, Unsecured Debt: Debt that is not guaranteed by collateral - no assets are committed in the event of default. If the issuer is unable to collect on the loan, its value is lost. Most credit cards are unsecured.

V

Variable Expenses: Expenses that can change from month to month. Variable expenses include necessities that can be decreased (e.g., food, utilities) and non-essentials that can be eliminated (e.g., long distance charges, cable, magazine subscriptions, etc). Reducing these expenses is the simplest step in getting control of finances.

Variable Interest Rate: An interest rate that changes based on an economic index such as the prime rate. A variable rate credit card will often have an interest rate like "prime + 5.9%" meaning that the interest on the card is theprime rate plus an additional 5.9%. (See Fixed Interest Rate.) 

W

Warning Signs: Situations or events that suggest financial difficulty. For example, a warning sign could be using a credit card to pay for daily expenses. Other warning signs include paying only the minimum due on credit cards, one credit card to pay the monthly minimum on another card and routinely exceeding the limit on credit cards.

Z

Zero Balance:When the total outstanding balance is paid and there are no new charges or cash advances during a billing cycle.