Choosing and Using Credit Cards
To make the most of your credit cards, you should be an informed consumer. Here are tips for choosing and using credit cards to help you maximize the benefits and avoid the potential pitfalls.
Credit cards can offer numerous benefits to consumers, including a convenient way to pay for purchases, the ability to build a credit history, and the potential for rewards. Remember that any purchase you make with your credit card is a loan that must be repaid. As with any loan, you should select the right product for you and use it wisely.
To help you maximize the benefits and avoid the potential pitfalls, here are tips for choosing and using credit cards.
Choosing a Credit Card
Maximize your ability to get a good credit card by ensuring that your credit report is accurate. Correcting inaccuracies may help you improve your credit history and credit score, which card issuers will consider when deciding whether to offer you a card and how they will determine your interest rate and credit limit. You also can find out if an identity thief has opened credit cards or other accounts in your name.
By federal law, you are entitled to one free copy of your credit report every 12 months from each of the three major nationwide consumer reporting agencies — Equifax, Experian, and TransUnion. Each company issues its own report and because some lenders do not furnish information to all three of them, you should request a report from each one in order to get a comprehensive view of your credit history. Go to AnnualCreditReport.com to order free credit reports or for more information.
If you find errors, each reporting agency provides ways to ask for an investigation and a correction. In addition, you can request a correction directly from the entity that supplied the incorrect information.
"Your credit reports play a large role in what credit you will qualify for, so it's important that they be accurate," said Jonathan Miller, Deputy Director for Policy and Research in the FDIC's Division of Depositor and Consumer Protection (DCP). "If you find any mistakes on a report, you have both a need and a right to have them corrected. And, be wary of companies that promise to 'fix' your credit report. If there is negative information that is legitimate, there is no way to remove it, although it will expire from your report after a period of time."
Determine what type of card best meets your needs. First, think about how you will use the card. In particular, do you expect to pay your card balance in full each month or carry a balance from month to month?
If you don't pay your card balance in full each month, the best card for you may be one with a low Annual Percentage Rate (APR). If you do plan to pay in full each month, you might instead focus on whether there is an annual fee, rewards, or other features.
Shop around and compare product terms and conditions. Although you may receive credit card offers, don't assume these are the best deals for you. If you decide you need to apply for a card, compare multiple products from several lenders. Various websites can help you compare product offerings from different institutions, but be aware that some sites list only companies that pay to advertise there.
What factors should you consider? Federal law requires creditors to disclose important rate and fee information to you before you apply. "This enables you to make apples-to-apples comparisons for the most important factors," pointed out Elizabeth Khalil, an FDIC Senior Policy Analyst.
Here is additional guidance on how to compare key terms and conditions:
- Annual Percentage Rate: The APR represents the annual cost of the credit. In general, there are three types of APRs that might be applicable to your card: for purchases, for balance transfers from another card, and for cash advances. Pay attention to introductory rates. Some credit offers, such as balance transfers, come with special low interest rates that will increase after the promotional period.
- Fees: These can include annual fees, balance transfer fees and cash advance fees (in addition to any interest you might pay), foreign transaction fees, and penalties for late payments or returned payments. Determine if fees can change over time, as many cards will waive an annual fee for the first year but will charge it in later years.
- Rewards: These programs can be complicated, with specific eligibility rules. Know what you need to do to qualify for rewards, which might include meeting spending requirements, and how much you would have to spend to accumulate enough points or miles to get what you want. Understand what you need to do to maintain your reward points, since they can sometimes expire if an account is closed or considered inactive.
Do your homework before signing up for promotional offers or additional products. Some credit cards come with promotions that are enticing but may cost you more money in the long run. For instance, some credit cards marketed by retail stores offer "no interest" on balances for a certain period of time, such as the first 12 months after purchase. However, if you don't pay off the entire purchase balance by the end of the time frame that was disclosed, you may be charged all of the interest that accrued since the date of purchase. "With any deferred interest offer, it's important to pay the balance in full before the promotional period ends," said Matt Homer, a Policy Analyst at the FDIC. "If you can't do that, a better fit might be a credit card with a low APR that doesn't expire after the promotional period."
Additionally, credit card companies might offer other credit-related products, such as credit protection (to pay, suspend, or cancel part or all of your outstanding balance in the event of a specific hardship) and identity theft protection (to monitor your credit reports for signs that a crook attempted to use your name to commit fraud). "Make sure you fully understand how these products work and how much they cost by reading the fine print and asking questions before you sign up," advised Homer. "Also evaluate whether the price you will pay justifies the value you will get from the product."
Using a Credit Card
Review your card statements carefully for billing errors and other problems and report them quickly. The FDIC's Consumer Response Center reports that billing disputes and error resolution problems and processes are the most common types of complaints related to credit cards. If you notice a billing error, such as an unauthorized charge on your statement, contact the card issuer as soon as possible.
Checking your account periodically also can help you monitor your spending. "You may want to sign up for alerts on your mobile phone or through e-mail that inform you when your credit card has hit a specific balance amount or you are close to your credit limit. Other alerts can remind you about an upcoming bill," Homer added.
Review all communications from your lender. Keep a copy of your cardholder agreement and look at all other mailings from your lender because they may include notices about adjustments to the important terms of your card. For example, a credit card issuer must typically provide customers a 45-day advance notice of an interest rate increase.
Pay on time to limit late fees and protect your credit history. If you miss a payment, you'll likely be charged a late fee, which can sometimes be up to $35 or more. Late payments are also reported to the major consumer reporting agencies, which can harm your credit history.
Pay as much as you can to avoid or minimize fees and interest charges. While it may sound like a bargain to pay the minimum amount due, the long-term costs can be staggering. You will generally be charged interest on the unpaid portion of your balance at the beginning of a new billing cycle and your credit card issuer may start charging you interest from the time of purchase. If you can't pay the full amount, paying even slightly more than the minimum amount due can reduce your interest costs.
Set rules and monitor transactions if you add an "authorized user" to the account. Adding an authorized user can be a way to jointly manage your finances (for your convenience) or to help someone else (such as a relative under 21 years old) establish a credit history. Remember that you will be liable for any charges the authorized user makes with the card, so make sure to have a mutual understanding about your expectations as the account owner. Also, consider asking your card issuer to place a spending limit on the card assigned to the authorized user. And, of course, be sure to regularly monitor the account and take appropriate action, if necessary.
Protect your card from fraud. Never provide your credit card numbers — including the account number and expiration date on the front and the security code on the front and/or back — in response to an unsolicited phone call, e-mail, or other communication. When using your credit card online, make sure you're dealing with a legitimate company.
You should also take precautions at the checkout counter and gas pump, watching for card reading devices that look suspicious, such as a plastic sleeve inside a card slot or other possible signs of tampering.
If you have lost your card or are the victim of identity theft, contact your credit card company as soon as possible. Write down the contact number printed on the back of your card and keep it somewhere else that you can quickly access.
Security breaches at major retailers have some consumers concerned about using their credit cards. Federal law protects consumers from unauthorized activity, and card issuers often will waive any liability for fraudulent purchases that are reported promptly.
Contact your card issuer first when trying to resolve a complaint. Before calling, think through and summarize what the problem is and what you'd like done about it. This will help you remember the key points of the issue. In case the financial institution doesn't agree to your solution, think about other alternatives you might propose or accept.