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Do You Really Need a Credit Card?

Deciding whether you need a credit card is really a personal matter. If you're just starting out and don't have much credit, credit cards can help you establish a credit history. In certain circumstances, a credit card is almost a necessity. For example, it's difficult, if not impossible, to reserve a hotel room or a rental car without one. In situations where your cash flow pipeline may be temporarily plugged, credit cards can provide short-term, interest-free loans, providing you pay off your entire balance each month.

However, you shouldn't think of getting a credit card as a way to purchase things you can't really afford. If you want to get a credit card because otherwise you'll never be able to buy that stereo system you've been dreaming of, you don't need a credit card; you need a budget. Just as you would when making any financial decision, weigh the various advantages and disadvantages of credit cards before deciding that you need one.

How to Apply for a Credit Card

Credit card offers seem to be everywhere: stuffing your mailbox, flashing on the Internet, even peeping from the pages of the magazines you find in your doctor's waiting room. To apply for one of these cards, all you need to do is mail in a short application form, call a toll-free telephone number, or log onto a web site. Credit cards are also available through local banks and credit unions, retail stores, and even gasoline companies. Whether or not you qualify for a card will depend on how the issuer evaluates your income, credit history, employment history, and other factors.

What You Should Consider When Shopping For a Credit Card

Evaluate the Costs and Benefits

All credit cards will cost you something (although some may cost more than others), and most of them will offer you a variety of benefits. When evaluating a credit card offer, here are some points to consider:

  • How widely (internationally, nationally, regionally, or locally) is the card accepted?
  • How much is the total credit limit, and how much is the cash advance credit limit?
  • What's the interest rate, and how is it calculated?
  • Will different interest rates for purchases, balance transfers, and/or cash advances apply?
  • What method determines the outstanding balance used to calculate the finance charge?
  • What is the grace period (if any)?
  • What fees may be charged?
  • If your card accesses an automated teller machine (ATM) network, are the machines conveniently located?
  • What special services or other enhancements (e.g., purchase protection, credit insurance) are available, and will you incur any additional cost for them?

Think Outside the Local Box

You can obtain a credit card application at your local financial institution or at retail locations. However, there's really no reason to prefer a card just because it's issued locally. National banks or credit card issuers may offer better terms, and their customer service representatives are usually available 24 hours a day, 7 days a week, to help you if you have questions or problems.

Since every credit card issuer establishes its own policies, interest rates, fees, and benefits, it's wise to shop around for the card best suited to your needs. The Federal Reserve Board twice annually publishes its survey of credit card plans offered by a wide variety of financial institutions; you may access the latest survey results at their web site ( www.federalreserve.gov ). In addition, you can find many other commercial web sites that compare credit card plan offers. Magazines and newspapers also often list competing credit card rates.

Risks Associated With Applying For a Credit Card

Credit card issuers tend to be cautious when they notice certain patterns appearing in your credit report. For example, if you apply for several cards at once, issuers may want to know why you have a sudden need for multiple lines of credit and may deny your credit application.

Also, keep in mind that even if you don't carry a balance, your credit cards appear on your credit report as available credit. If you fail to close account you no longer use, you could actually damage your creditworthiness. You could later find yourself being turned down for a car loan or a mortgage because you already have too much available credit.

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Be wary of credit cards with very attractive introductory interest rates. Everybody loves to get something for nothing (or next to nothing), but these "teaser rates" are usually in effect for only a few months, and then they're replaced by rates that can be three to four times higher. If in the meantime you've accumulated a significant balance on the card, you may be in for sticker shock when you see the finance charge calculated using the new rate.

What Information the Credit Card Issuers Will Consider

By law, credit card issuers may only use certain criteria in determining your eligibility for a card. They'll evaluate your creditworthiness by considering factors such as the following:

  • How long you've worked at your current job
  • Whether you own a home or rent
  • How long you've lived at your current address
  • Your credit history
  • Whether you carry balances on credit cards you already have
  • How your outstanding debt compares to your income
  • How many applications for credit you've recently made

When evaluating your eligibility for a credit card, the issuers will look at the same indicators of creditworthiness that any unsecured lender would scrutinize. They'll pay attention to the three C's:

  • Capacity -- the level of debt you can repay, given your income and other obligations
  • Collateral -- assets you own (such as a home, car, or bank account) that they may attempt to seize if you default on your debt
  • Character -- a measure of your financial stability, as indicated by such factors as your length of employment, length of residency, and homeownership

In a relatively recent nod to efficiency as much as to objectivity, credit card issuers may now evaluate your creditworthiness using a risk scoring system (a summary of information in your credit report). Developed by independent statistical modeling firms, these systems, of which there are thousands, give weight to a variety of factors important to the card issuers themselves. In such cases, decisions about your creditworthiness may not be made by an individual reviewing your credit application. In fact, your acceptance or rejection for a card may be "untouched by human hands."

Tip: Under the Fair and Accurate Credit Transactions Act of 2003 (FACTA) , you have the right to request your credit score from the three major credit-reporting agencies. The agencies must also inform you (among other things) what (if any) factors may have adversely affected your score. You may be charged a small fee for this service.

Credit card issuers are generally leery of applicants who don't have a steady income, who move around frequently, or who have slow payment histories or other blemishes (charged-off accounts, repossessions, foreclosures, court actions by other creditors, or bankruptcies) on their credit reports.

What Credit Card Issuers Can't Ask You

The Equal Credit Opportunity Act (ECOA) prevents an issuing company from considering certain factors when deciding whether to give you a credit card. The issuer can ask you to volunteer your gender, race, national origin, or religion, but they can't require this information. They may ask if you're under 21, because you can't get a credit card if you are, unless you can either demonstrate the independent means of repaying the debt or have a cosigner over 21 who is capable of doing so.

They may use the terms married, unmarried, or separated regarding your marital status, but they can't ask if you're widowed or divorced. If you're married but applying for a separate unsecured account, they can't ask you about your spouse's income or other financial information unless you live in a community property state. They can only inquire about alimony, child support, and separate maintenance payments if you plan to rely on these funds for repayment of the debt.

If You're Denied a Card

The ECOA requires a card issuer to inform you in writing of its decision on your credit card application. The issuer must do so by letter within 30 days of receiving your application and other relevant material (such as your credit report). If your application for a card is rejected, this letter must either give you specific reasons why, or it must give you information (usually a toll-free telephone number or a mailing address) about how to contact the issuer to learn those reasons. If you need to contact the credit card issuer for this information, you must do so within 60 days.

If the card issuer used your credit report in a decision to reject your application, the issuer must provide you with the name and address of the credit bureau that furnished the report. The ECOA entitles you to a free copy of your credit report from that credit bureau if you request it within 60 days of being rejected for credit.

You should get the report and review it carefully. If you discover erroneous information on it, you can dispute these notations with the credit bureau to get them corrected. Doing so may help you later obtain the credit for which you were earlier rejected. If you feel you were unfairly denied credit, you can contact the card issuer (it's best to do so by letter) to plead your case. Address the specific reasons you were denied credit; if your credit report has been corrected, inform the card issuer. If you have a reasonable chance to reverse the card issuer's decision and you persist, you may be successful.

Tip: If you feel you were denied a credit card for any discriminatory reason, you can file a complaint with the Consumer Financial Protection Bureau at www.consumerfinance.gov.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

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