Sunday, 10 February 2008

Tips on credit card use, Part 1: Credit card applications and credit history

This is the first part of the Credit Card Tips series, which is related to your credit card applications and your credit history.

Credit card applications:
  1. To build up your credit history, if you do not have one because you are too young or just settled in a new country, first try applying for a local retailer shopping card with a small credit limit. Most major retailers, like Sears or HBC, have such card programs.

  2. Do not apply for a major-bank credit card if you do not have a source of permanent income and/or good credit history. Remember that denied applications are reflected in your credit file and can damage your credit score. Always inquire the bank about the causes of denied application.

  3. Do not apply for credit cards very often or only to get a short-term interest promotion. Remember that each additional credit application, even if successful, can negatively affect your credit score for at least several months because it increases your overall leverage.

  4. Opening a new credit card account solely for the purpose of receiving a 3-month interest-free promotion on purchases on purchases and/or balance transfers is probably not a smart move. The potential benefits are relatively small, while the potential costs, in terms of a dented credit score and regularly priced interest costs in the future, can be large. Many people simply forget or can’t afford paying off a full balance when a promotion period ends, which means that they start paying regular double-digit interest on what originally seemed to be like an interest-free purchase or loan.

  5. Think twice before opening a retailer credit card just to receive a promotional 10-20% discount on your same-day purchases. Many people are hypnotized by discount figures and do not realize that their savings may in fact be negligible, especially if they just buy a pair of socks or a shirt. Another danger is that you may convince yourself to buy an expensive item, which you were not planning to buy at all on this day, just to receive a discount. Whether you could afford this purchase is another issue that normally arises a few weeks later when your discounted, yet formidable bill becomes due.

  6. Never apply for a credit card which has an annual fee. The market for consumer debt is competitive enough in Canada and the States, so that you can easily find a card which is fee free. In fact, many promotional offers lately provide you with a gift card or a sign-up bonus in the form of a refund against your future credit card balance.

  7. Do not apply for too much credit or for a credit balance extension if you do not really need it. Increasing your credit limit, while possibly useful and practical in the short term, also reduces your credit score and increases your potential costs in the long run. For example, I was surprised to learn that doubling a credit limit on our credit line (not backed by residential equity) substantially reduced my credit score and also resulted in a new higher interest rate on credit line balances.

  8. Do not apply for a credit card over the phone, especially if you receive an unsolicited call from a sales agent. Ask for the application package to be mailed to you if you are interested and decline an offer you are not. Remember that this call can be a fraud and a person who is calling may be trying to obtain your personal information. Also, do not get caught off guard by various “once-in-a-lifetime” and “today-is-the-last-day” promotional offers. Remember that promotions on credit cards come and go and there will be better offers in the future if you decide to pass on this one.

  9. Do not write or tell your social insurance number when applying for a credit card. You are under no obligation to provide this information, which is optional in all credit-card applications.

  10. Always carefully read small-fond provisions on a credit-card application. If you see some fees or charges that you do not understand or do not feel comfortable about, either call a customer service representative to ask a question or simply dispose of the application.

Credit history:
  1. To make sure that your credit file is in good standing and free of errors, order your free credit report once a year from one of the major national credit bureaus. For example, both in Canada and the States, the relevant major credit bureaus are Equifax and TransUnion. The relevant Canadian links are here and here. For a relatively reasonable extra fee, you can also get your credit score and a more detailed report, explaining why your credit is low/high and where you stand in terms of your credit quality relative to your fellow Canadians or Americans. I have ordered mine before from Equifax for $24, and it was quite useful.

  2. When you get your credit report, check it carefully to see that all information in there is correct and that there are no mistakes. If there are any (this can happen because of processing and technical errors), then contact the credit bureau and the relevant credit provider to explain the situation and resolve the issue.

  3. When you look at components of your credit report, note what credit accounts and past transactions have caused deterioration of your credit score and take necessary steps to improve the situation.

The second part of this series will include tips on credit card use and relevant security considerations.

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