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A no-limit credit card can damage you -- even if you pay it off in full every month -- because the most commonly used method of determining risk is flawed.
By Bankrate.com
A no-limit credit card, often considered a valuable perk for cardholders, could, in fact, damage your credit score and make any debt you take on more expensive.
"Consumers who are thinking of opening one of these no-limit credit cards may want to think how deeply their scores will be affected," says Craig Watts, spokesman for Fair Isaac, the corporation that developed the well-known FICO score.
The problem is something called "credit utilization," which is the ratio of a cardholder's actual debt to his or her potential debt. In other words, if a consumer has a $10,000 credit limit and a $5,000 balance, the credit utilization is 50 percent. Credit utilization accounts for 30 percent of your credit score. The lower it is, the better it is for your credit score.
However, if the card has no limit, the credit-scoring company can't make the credit-utilization calculation, and that has an effect on credit scores.
Watts says credit card companies that offer no-preset-limit cards will, typically, allow credit-scoring companies to use the highest balance in place of the limit to calculate your credit utilization. So, if the cardholder has a $20,000 balance one month, that becomes the limit used for credit utilization.
What's not reported matters
But card companies don't always report the highest balance.
Anthony Citrano, a partner in a Cambridge, Mass., public relations firm, opened a Citibank World MasterCard account in November of 2004. Within two months, his credit score dropped 50 points at Experian and 35 points at Equifax. Inquiries to the credit bureaus revealed that Citibank wasn't reporting his highest balance.
"It made it look like I was using all of my available credit, which is ironic, because I'm unlimited in how much I can charge on my Citibank credit card," says Citrano.
When he called the Citibank customer service department to get an explanation, he says he was told that they had received numerous complaints about his particular problem but offered no solution. Instead, they instructed him to fax a dispute letter.
Citrano eventually received a letter explaining that "the consumer is protected from appearing to be over the credit limit," since he has no pre-set spending limit on his credit card and no limit is reported.
"I understand not reporting a credit limit if one does not exist," Citrano says, "but to report zero as a high balance seems dishonest and deliberately destructive."
When Bankrate.com inquired about Citrano's problem, a Citibank media-relations specialist issued the following statement:
"Card agreement states that the customer has flexibility to make purchases in excess of his/her credit limit. Therefore, we do not report to the credit bureaus the revolving credit line amount. We do report the current balance to the credit bureaus and maintain that our credit reporting is accurate."
Creditors who do not report high balances are not breaking any rules under the Fair Credit Reporting Act, according to Office of the Comptroller spokesman, Dean DeBuck.
A customer service manager at Citibank offered Citrano the opportunity to close the card or switch to another Citibank product.
"The thing is, I like the card. It gives me rewards like air miles, and I have perks that are not offered on other cards. I'm a businessman who spends a lot of money using my credit cards, but I never expected that with my income, and credit score and history, that I would be faced with disintegrating credit."
What consumers can do
Since credit card companies that offer no-limit cards will often use the highest balance in place of the limit to calculate your credit utilization, there is a way to improve a credit score.
Fair Isaac's Watts says consumers who hold no-limit credit cards can work around the lack of a credit limit by running up a high balance one month and paying it off. That way, you have a high-balance number in place of a credit limit, reducing your credit utilization percentage. Of course, that only works if the credit card issuer reports the highest balance.
If it doesn't, one recourse would be to close the account. Another would be to ask your creditor to report your balance. However, according to Terry Clemans, executive director of the National Credit Reporting Association, there is no guarantee that your credit limit or highest balance will be reported month to month.
"We always hope that any and all information about consumers is reported to the credit bureaus, and we can only hope that if more people learn about this, the issues will take center stage," Clemans says.
However, one concern is that most people don't know what the no-limit card has done to their credit rating.
"Generally speaking, most of the affluent consumers with no-limit credit cards might not notice a significant drop in their credit score because they are very busy," says author and consumer advocate Evan Hendricks. "These are businesspeople with busy lives and believe because they are the cream of the crop in the credit-scoring field they are getting a rewarding handshake by their creditors."
The most damaging issue about unreported information is that many consumers find out about the problem when they go to apply for mortgage or car loans.
The best way to protect yourself is to check your credit reports at all three credit bureaus to find out what information is listed.
By Kristin Arnold, Bankrate.com
When it comes to debt, credit cards are usually what lead most people astray. The problem with these cards is that they are easy to get. Even someone who has questionable credit can get a credit card.
Some people are very good with their cards and use them only when necessary. Others, however, use them to buy things that they really can’t afford.
Once one card is maxed out, these same folks will apply for and receiving more credit cards. Before they know it, they are overwhelmed with their bills and they can only make the minimum payments. This is when credit card debt consolidation might be a smart move to make.
Clear Debt Solution offers programs to help with credit card debt. Read more about possible solutions here.
The problem with making the minimum payments on credit card bills, is that usually nothing happens to lower the total amount of debt. Most of the time, minimum payments are just enough to cover the interest portion of your debt. When this process happens, the credit card will practically never be paid off.
Credit card debt consolidation is a huge help when things get out of control. Some companies talk with each credit card company to lower consumer's payments. And in other cases, they can lower the total amount of debt owed for each credit card. This helps make repayment much easier for the consumer.
Often, people take a step beyond this option. They consolidate all their cards into one monthly payment so that the payments are affordable. These payments might be made directly to the credit card companies, causing the debt to shrink quickly. The amount of time this will take depends on the size and scope of the debt.
However, there are some other people that will arrange for a loan to pay off all the debt. The consumer will then only have their current monthly bills, their day to day expenses, and a small loan payment to worry about each month.
If in need of credit card debt help - Clear Debt Solution offers debt settlement services that help provide the debt relief you're looking for.
When taking advantage of credit card debt consolidation, a family has to be smart about what they do next. Someone in this position may benefit from a credit counseling program so they do not make the same mistakes again. Some people should be without credit cards for a while, and others can begin again, but should do so under the advisement of someone who can teach them how to handle their money and curb impulse buying. Credit counseling can help with all other bad financial habits as well, and can ensure a family or person will be equipped with the right habits to remain debt free in the future.
One of the biggest problems facing consumers is credit card debt. Most people start out well, but somewhere along the way, something goes wrong. You will find most people have no intentions of getting in too deep, but it happens. This is when most turn to someone who offers credit card debt help. When the bills are piling up and there seems to be no end in sight, getting more cards to pay off the old cards is not the smart thing to do, but there are many who do just that.
This would be a good time to start looking for a company that offers services to bring debt relief. This can be in the form of debt settlement or debt consolidation. These companies can help them consolidate their payments, or negotiate payoffs to get the debt out of the way for a fresh start.
Debt consolidation loan? Consumer credit counseling? Is your credit card debt out of control? How do you know what is the best option for debt relief???
Quite often, credit card debt help is for those who have more than one card that is over the limit. Some companies won’t help someone with only one out of control card, though they would be good candidates for consumer credit counseling. When you contact someone, they will tell you if they can help you out or not. If they can help you, there are two different approaches they may suggest. One would be a debt consolidation. This means all debts are combined into one. A loan may be suggested, and it will have a very low interest rate in comparison to what you are already paying. Other times, there will be payments made each month to knock the debt down.
When learning about credit card consolidation, it's imperative for debtor's to know there are a variety of options available to reach financial freedom. Sometimes people are tied to the misconception that consolidation is only defined as combining all their debt into a loan. When in reality, there are many programs available when trying to consolidate debt.
Consolidation can be a single loan compiled with many debts that are put into one monthly payment. A slightly different form is debt settlement, which is where a single payment is made to yourself into an account where you ultimately pay off your own debt. A third option is credit counseling, which involves making a single payment to a nonprofit organization, who in return disperses that payment to your many creditors.
Altogether, credit card consolidation can be a very promising choice for debt relief, but people need to take into consideration a few different key points. One thought to consider is that there are multiple choices available for debt relief. A second thought is to keep an eye on both the positive and negative attributes of the multiple credit card consolidation options, consolidation loans, credit counseling, and debt settlement. Lastly, a person in debt should shop around before making any concrete decisions when considering which consolidation option and company choice to use.
Why do we chose to use credit cards? Do we not realize the consequences, or is it that we just don't care?
Often, when money runs short and life takes unexpected turns, we turn to our little two by three inch piece of plastic. This small device has a large horizon of opportunity and possibilities. Ironically, this prized piece of plastic is held highly as an aid to assist with financial shortcomings, while when used far too much it is disregarded as a burden that does nothing but create a financial hardship.
So, if these consequences are presented to us prior to the use of these plastic devils, why do we persistently press on with them?
I will tell you why.
As I have witnessed friends and family members, I too have personally suffered the pressures of juggling finances with life necessities. Struggling to balance everything life throws at us is quite difficult. With the economy ever changing, abrupt pay cuts and loss of jobs cause monetary crises.
If and when these events occur, people sometimes turn to the credit card companies for help. Having a credit card gives people the opportunity to purchase items with borrowed money. When in a financial hardship, people might use credit cards to purchase the day to day basics. They might buy groceries for their family, they might put gas in the car to commute to and from functions, they might purchase clothing for keeping warm, etc.
While in this type of situation, it is more acceptable to use credit cards. It is the people who take credit cards out in order to charge, charge, charge. The people who don't care about their credit or what they are purchasing with their plastic game piece make it harder for those who play the game fair. These high spenders cause the credit card companies to generalize about all credit recipients, thus raising the interest rates to astronomical amounts if one payment is made late by anyone.
In this game of plastic pieces swiping madly across home plate, the credit card companies are the referee and the debtors the players. Until the all the players learn to play fair, the referees will continuing rearranging the score.
There are many times throughout life you will need your credit. When making big decisions and life altering changes, often time your credit will be ran and cross checked before a finalized answer is sufficient.
One time your credit is used is when you move your place of residency. When choosing to move into an apartment or condo complex, your credit is always checked. The reason being that your credit report shows your financial history, any debts you may owe, and how well you've kept up with your monetary obligations. Your credit also comes into play when moving into and purchasing a house or town home. It is usually unlikely to get approved for a mortgage loan if you have delinquent debt and/or a low credit score.
Another time your credit is pulled is when you are in the market for a new automobile. Once you have selected the car of your dreams, you then need to worry about the money that goes into purchasing it. Unless you have a large sum of money to pay for the automobile up front, you will again be turning to your credit to help you out. If your credit isn't exactly stellar, then there is always the option of going at it with a co-signer who does have good credit.
Yet another occurrence in which your credit assists financially is when people go to college. Often, students enrolling in college don't have the necessary funds to pay for their tuition. Very few students have enough finances set aside to afford the years of schooling they will go through. In turn, they must rely once again, on their credit. A commonality among students is presented at this point, which is that they need to borrow money from the government and organizations that assist with financial aid. Unless their credit history is excellent, they will likely need a co-signer with good credit to be approved to take out such large sums of money to help pay for their tuition.
So when thinking about credit, I like to think of it as a shadow. It can vary in shades of dark and lightness and no matter which path you chose to walk, it will always follow you.
Have you ever been in the market to either purchase something or move into somewhere that requires a clean bill of credit? Sure, we have all been in one type of situation or another like this before, but what is the solution if we cannot get past it?
The answer is simple. The process is not.
The simple answer is to clean up your credit history. The complicated process to do so is as follows.
The first step to take is to pull your credit report from a credited source. There are three credible sources to chose from. The three major credit bureaus are Experian, TransUnion, and Equifax which can all be found through the website www.annualcreditreport.com.
Next, contact each institute that is holding your negative credit by phone and by mail. You will want to do this for two reasons. The first reason for this will be to close your accounts and remove any other possible persons who might have access to the account. The second reason is to verify that that institute actually does have your debt by requesting them to validate your debt in writing.
The third step to take is to secure your debt. By saying this, I mean to take the right precautions as to deter identity theft. In order to do so, check your credit report between three to four times a year. In doing so, you are making sure that your identity has not been comprised and that you are still current with your knowledge of how much debt you're in.
If taking all the necessary precautions, you will be on your way to a clean credit report in no time. Good luck!!
If we all think credit cards are such a bothersome headache, why then do most of us use them? The answer usually remains the same-we need help!
Each and every day, people are faced with various struggles and hardships. These struggles and hardships may range anywhere from small scale to large scale and everywhere in between. One person might get laid off from a job he needs to support his family. One person might enroll in college and not have enough funds to cover tuition and books. Another person might get into an accident that requires medical attention and not have the thousands of dollars those medical bills add up to be. So how do these very different scenarios all have the same common ground? None of these people would be able to survive without the help credit cards allow us to use.
As consumers, there are endless reasons why we lean on credit cards for support. Sometimes people use credit cards in case of emergencies. Sometimes people use credit cards in times of loss and despair. And sometimes people use credit cards in moments of weakness. In saying this, it is easy to see and understand why so many of us fall into the deadly trap of spending when we don't actually have the money available to us to do so.
In our world of constant spending, one element seems to always remain the same- people use credit cards. Whether we honestly need the financial help credit cards can provide, or if we are just being selfish and spending money that isn't ours, people will always have credit cards available for individual wants and needs.
Irresponsible, forgetful, immature, dependent, lazy, freeloader…these are all words that are sometimes used when referring to people who have bad credit.
So how do we change this counteractive way of thinking?
Simple. Educate to a wider spectrum of people.
Credit that is considered bad or negative, can affect you and your life in many ways. Besides the usual avenues that require good credit, such as buying a car, applying for a credit card or a loan, getting acceptance into housing, there are also unusual avenues that need your good credit to establish who you are and what you’re capable of. One such example when your good credit is needed is your employment.
As strange as this might seem, your future employers might look into your credit history. Possible reasons for checking into your credit report might be to see how responsible you are and if you can handle all your given obligations. They could also be verifying if you have been known for making late payments in the past, or have been delinquent on your accounts. Employers, as well as loan officers, may frown upon you since your bad credit makes you look like a bad guy. In saying so, I am referring to people generalizing and stereotyping others based on a piece of paper and their financial history, not on who they are as a person and what characteristics define who they are.
So, instead of passing judgment and placing blame, educational materials and professionals need to be more nurturing and approachable in order to help individuals with bad credit. If this type of help were available for all, there would not be as deep a debt in our society, and there would not be so much negativity in our culture.
"Financial education needs to become a part of our national curriculum and scoring systems so that it’s not just the rich kids that learn about money.. it’s all of us." David Bach.
As this quote clearly identifies, understanding the ins and outs of all the fragments that make up financial concepts is a necessity. According to wisegeek.com a finance fee is, "any additional fee added to the original amount of a loan can be called a finance charge. This definition of finance charge includes the interest added to the balance, service fees for transactions, late fees, and balance transfer fees".
Another way to think of finance charges is to pay rent for borrowing the money. If you were to make consistent and on time payments on the borrowed money (account) each month, than you would not be charged that month's rent (finance charge). However, if you missed or were late on a payment, the rent money (finance charge) would be tagged onto your borrowed money (account). So in other words, you are paying to use money and that amount increases each time you miss a payment or are late.
When it comes to the world of credit and borrowed funds, having the highest score means having the best record.
There are many possible techniques to choose from to hit a home run with your credit score. One course of action is to keep your credit cards as low as possible. In order to do so this means no splurging or impulse buying of unneeded products and services. It also means to only use credit cards in case of an emergency. By keeping your cards balanced at the lowest end of the spectrum, the better your credit number will be.
Another plan to consider, is to never max out any of your credit cards. Sure, this sounds simple enough, but it's not. Due to temptation and the strong sense of 'needing' things, we often are unable to just say 'No'. There is also the chance of experiencing one bad incident after the next, thus decreasing your available funds and increasing your credit card needs. No matter how difficult times may be or how strapped for cash you are, don't ever charge your cards to their maximum allowed credit line; the only result to this windfall is a deeper hole with delving scores.
A third plan to utilize is to clean up and repair your credit report, if and when you have damaged it. As previously mentioned, it is key to limit your credit card usage, however, it is sometimes inevitable as emergencies tend to present themselves in the worst times. But, there is a light at the other end of the tunnel, as well as tools to help raise your credit score again. Debt relief programs such as consolidation loans, credit counseling, debt settlement, debt management, and even bankruptcy, are all tools in which people can use to help repair the damage they've done to their credit score.
Therefore, if you keep to these three bases of knowledge, you will almost surely hit the home run that guarantees your highest score!!
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