Credit Card Selection

The debate on the good, bad, and ugly about credit cards is one not likely to end anytime soon. The reality is that most people have them, few people understand them, and many people create untold credit and financial problems as a result of misuse. What I want to address are some of the common criteria that should be evaluated when considering what card I should get [the whether I should or shouldn’t get one is a post for another day] … the type of card should largely be a byproduct of how you will use the card (pay in full each month, carry balance, etc.). There are plenty of options – 30,000+ to choose from.

ANNUAL FEE. Fee charged for membership privileges – typically $50 to $100 per year. By shopping around, this is a fee I can/should avoid – 75% of cards do not charge an annual fee.

INTEREST RATE. This is obviously a high priority if my tendency is to carry a balance. Rates can vary dramatically – common rates on the low end are around 8.9% (you can get lower – I have a card I got a while ago with a fixed rate of 4.9%); on the high end, I’ve seen fixed rates approaching 30%. For students, a ‘normal’ range for a “good rate” will be 12% - 16% (unless of course you already have established credit). Pay attention to the fine print: introductory vs. long-term rate, variable vs. fixed rate, and default rate (if I am late on a payment) are all important elements.

BENEFITS. More and more credit cards are offering ‘perks’ to members for card use … the benefits vary dramatically: cash back, flight miles, insurance (rental car, flight, etc.), shopping discounts, gas rebates, and donation of % of charges to your charity are some of the more common examples. Read the fine print – Do I have to spend a certain amount to receive the benefit? Are there limitations on how much I can receive? Do the rewards expire? Are there other caveats/ stipulations? Ultimately, ask yourself ‘does the benefit exceed the cost?’ It doesn’t make sense to pay 21% to a credit card company in exchange for 1% cash back …

FEES. Annual fees can be avoided – if I’m late, or over-the-limit, my card is going to charge me. The question is how much? The answer is $35 [or more] per ‘offense’ in most cases. Balance transfer, convenience check, and cash advance are all other transaction fees to inquire about.

OTHER ISSUES. The items mentioned above are some ‘general’ questions to ask about – you may have other ‘specific’ questions you want to have addressed: customer service, level of credit limit, penalties (universal default?), how widely is the card accepted (Discover, AmEx), etc.Many websites are available to help you examine these criteria more closely as well as search amongst the wide array of card options to find one that will be most suitable for your needs.

CARD SEARCH/COMPARISON TOOLS:
- Bankrate
- CardRatings
- CardTrak
- Credit Card Clients
- Credit Cards Compare
- Credit Cards.com
- Index Credit Cards
- LowCard$

INFORMATION/RESOURCES:
- Bankrate
- Choosing a Credit Card – FRB
- Credit Card Blog
- Getting Credit – FTC
- Wikipedia – Credit Cards

Credit Inquiries

Properly managing credit is a common concern for many people. Being able to do so effectively involves balancing many issues, one of which is understanding the impact of inquiries on credit. Fair Isaac (the company that developed the most commonly used credit scoring model – the FICO score) estimates the impact of inquiries to be 10% of one’s overall credit score. This definition of “new credit” as it is referred is comprised of:

• Number of recently opened accounts.


• Number of recent credit inquiries.


• Time elapsed since recent account openings; by type of account.


• Time elapsed since inquiries.

A credit inquiry is “an item on a credit report that shows a business with a ‘permissible purpose’ has previously requested a copy of the report.” What do I need to know about inquiries?

1. Personally viewing your credit DOES NOT negatively impact your credit.
   If you get nothing out of this tip other than this one fact, I’ll be happy. Don’t be afraid to review your credit because of the negative impact the inquiry will have. IT DOES NOT HURT YOU. Viewing your credit for mistakes, potential fraudulent activity, etc. is the responsible thing to do. Remember to use the government’s free site to order your report(s) - one free report per year per bureau.



2. Understand the two general types of inquiries.
   There are two main types of credit inquiries – often referred to as “hard” and “soft” inquiries/pulls. Hard pulls are voluntary, meaning that you initiated the action for a particular company to view your credit. Fair Isaac mentions that the impact of hard inquiries can vary (depending on your ‘level of credit’ – the more established the credit, the less the impact); but they can temporarily lower one’s credit score up to 5 points [it will lower the score for 6 months after which time it will go back up]. Soft pulls on the other hand, are involuntary (offers for pre-approved credit, credit checks by prospective employers, inquiries by companies with whom you do business, etc.) they are visible on your report but only for informational purposes. Soft inquiries have no impact on your credit, although both types of inquiries will stay on your report for two years. Only hard inquiries are visible to people looking at your report; they won’t see soft inquiries (only you will see them). This fat wallet resource documents which companies will use a hard pull when reviewing your credit and under what circumstances. Some banks will do a hard pull when you apply for a checking account, cell phone account, [or other “non-credit” account] – others will do a soft pull to open the same account. I think it’s helpful to know how they do it since one impacts you and one doesn’t …



3. Don’t be afraid to shop for rates.
   Many people [because of the impact of inquiries on credit] are afraid to shop around to find the best loan terms for auto/mortgage or other loans. Shopping for a loan [through multiple sources] will show up as multiple inquiries on your report (since they are viewing your report). To compensate for this (since someone obviously isn’t going to get four mortgages), a credit score will ignore all mortgage and auto inquiries made 30 days prior to scoring. For inquiries more than 30 days old, the model will treat inquiries made in a “normal shopping window” as one inquiry. If your lender is using the ‘new’ scoring model, that window is 45 days; the window in the ‘old’ model is 14 days.