Advantages of credit cards

With the current credit crisis looming along with record credit card debt by American consumers, it’s tempting to write off credit cards completely. There is little doubt that carrying high credit card balances can quickly turn into a complete financial disaster, but responsible use of credit cards can carry many advantages. Here are some of the main advantages that credit card holders enjoy:

CREDIT CARDS CARRY A LEVEL OF CONSUMER PROTECTION THAT IS NOT OFFERED ON DEBIT CARDS

Many consumers are under the false impression that the same level of consumer protection exists on both credit and debit cards. This is not true, and in many situations the consequences can be devistating. Consider these facts:

* Debit card purchases can typically only be challenged if the card or card number was used without permission. In other words, if a debit card is stolen, the charge can typically be challenged and removed, pending an investigation. However, if the cardholder did authorize the purchase but was overchaged, the bank issuing the debit card will typically not remove the charge. At this point, the dispute is between the cardholder and the merchant, which may require a significant amount of time to resolve (if it can be resolved at all). A credit card company will typically remove a charge and negotiate with the merchant directly. Although there’s no guarantee that the dispute will be resolved in the cardholder’s favor, the card issuer does most of the work to resolve the dispute.

* A credit card is a line of credit and not actual cash. If a fraudulent transaction occurs on a credit card, a consumer has not actually been deprived of any real money. The only thing affected is the amount of available credit. If fraud occurs on a debit card, actual cash is removed from a bank account. If this happens to be the same account that the consumer’s mortgage, car payment and other household payments come from, the consequences can be many bounced checks and NSF fees. What would you rather deal with? An empty bank account or a credit card that’s over the limit?

* Credit card companies will sometimes offer additional protection if something is lost, stolen or damaged. The level of this protection varies from one card issuer to the next, so ask for details.

CREDIT CARDS ARE REQUIRED FOR MANY TRANSACTIONS

Car rentals, airline reservations, hotel room reservations and most online purchases are just some of the many examples. Although a debit card can be used for many of these transactions, the level of consumer protection is limited, as stated above. Consumers put themselves at greater risk by using debit cards for these transactions.

CREDIT CARDS HELP TO BUILD A SOLID CREDIT HISTORY

This is, perhaps, the best reason to have a credit card. With the current mortgage crisis only escalating, lenders are demanding higher interest rates for borrowers with lower credit scores and are raising the minimum credit score requirements for all types of mortgages. There are many ways to use credit cards in a responsible manner that maximizes the credit score. In addition to score requirements, most lenders require a borrower to have at least three accounts that are open and active on their credit report. Although they carry the Mastercard or Visa logo, debit cards do not help build a credit history and do not report to the three major credit bureaus.

SOME CREDIT CARDS CARRY SPECIAL BENEFITS AND BONUSES

IN addition to the benefits listed above, many credit card companies offer additional benefits, such as discounts on various products and services, points that can be used for airline miles, and special insurance and warranties for products.

And, of course, it wouldn’t be right to list the advantages of credit cards without also listing the disadvantages. The biggest disadvantage is the financial trap that many consumers fall into by using credit cards to live above their means. They simply provide an easy way to spend money that you don’t have. Also, credit card balances accrue with compound interest, so it’s never a good idea to carry a large balance on a credit card. Credit card companies have been equally as responsible as consumers for the overwhelming amount of debt that has accrued on the balance sheets of many American families, but it’s important to not miss the trees on account of the forest. The key is always RESPONSIBLE USE. If you can’t afford it, don’t buy it!

So what if you’ve had some credit problems in the past and can’t seem to get approved for a credit card? Consider applying for a SECURED CREDIT CARD. Secured credit cards can be obtained by almost anyone, regardless of past credit history. The only catch is they require a security deposit equal to the amount of the credit line. Simply put, if you want a secured credit card with a $500 credit limit, you’ll have to give the card issuer a $500 deposit. This deposit is not a fee; it’s credited as a savings deposit into an interest-bearing account. But you can’t withdraw the money as long as you keep the credit card (until the card issuer feels that a good payment history has been established, which is usually 12-24 months). If the money is needed prior to this time, the card issuer will return the money and close the credit card account, provided the full balance on the credit card has been paid.

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Secured Credit Cards

Many people who have gone through financial setbacks have struggled to rebuild their credit. The reason is simple: lenders are reluctant to extend credit to consumers with low credit scores, outstanding collections, past bankruptcies, etc. So what’s the best option for a consumer with a low credit score due to past credit problems? Apply for a SECURED CREDIT CARD! Secured credit cards are, hands down, the BEST WAY to re-establish credit and restore a good credit score. Most consumers have never heard of secured credit cards mainly because few banks have a vested interest in promoting them and many bankers simply don’t understand the fundamentals of how credit scoring works. Furthermore, unscrupulous credit repair companies rarely take the time to counsel their clients on how to re-establish credit and mainly focus on how to remove old derogatory items from their credit files. Although cleaning up old collections and charge-offs can indeed help raise the score, failure to RE-ESTABLISH new credit will keep the score lagging behind for years.

In other words, simply removing and/or paying old collections and charge-offs will not magically make the credit score raise high enough to qualify for a mortgage and/or many other types of consumer loans. New credit must be established in order to raise the credit score. Many people make the mistake of financing cars they do not need at ridiculously high interest rates in order to achieve this, when simply getting a secured credit card with as little as a $300 limit will do the trick over time.

How is a secured credit card different from a regular credit card? A secured credit card is, well, SECURED by a savings deposit equal to the amount of the credit limit and is held by the bank as collateral for repayment. In other words, give the bank $300 and they issue a credit card with a $300 limit. If the cardholder runs up a $300 balance on the credit card and defaults, the bank keeps the $300. It’s basically a no-lose situation for the bank, which is why practically anyone can get a secured card, regardless of credit history. If the cardholder keeps the account in good standing, the $300 remains in a savings account, and even earns interest. Typcially, most banks will release the security deposit back to the cardholder once they’ve proven their creditworthiness by making timely payments on the account for a period of 12-24 months. They will even, in many cases, raise the credit limit once this good payment history has been established. It’s important to note that the $300 is not a “fee”, it’s a “deposit” and it still belongs to the cardholder. The only way this money can be lost is by defaulting on the credit card per the cardholder agreement.

But what happens if an emergency arises and you need the $300? The bank will return the security deposit as long as the full balance on the card is paid in full and the cardholder agrees to close the account. The only way to lose the money is by defaulting on the credit card balance.

Underwriting guidelines for mortgages have tightened up significantly in recent months, and may continue to contract for many more months, even years. It’s NEVER been more important to have a good credit score when applying for a mortgage. FHA and Fannie Mae require a minimum of three tradelines that are open and have been active within the last twelve months in order to meet the minimum standards to qualify for a mortgage. In the past, it was relatively easy to use non-traditional credit references, such as letters of credit from utility companies, etc, to meet this requirement. But now many lenders are either imposing much higher interest rates for using this non-traditional method, or have stopped allowing this altogether. So it’s never been more important to build up a good traditional credit profile prior to applying for a mortgage. One nice feature about a secured credit card is the account stays open indefinitely unless either the cardholder or credit card company closes the account. Installment accounts, such as personal loans, automatically close when the term of the loan matures. In other words, once a 12 month installment loan is paid off, the account closes and this no longer counts as an open and active account, which reduces the long term impact on the credit score. (For more information on this, read about HOW CREDIT SCORING WORKS.)

So in conclusion, a secured credit card is a wonderful tool to increase both credit score and the overall likelihood of qualifying for a mortgage. As a loan officer, i can not guarantee this will result in a loan approval, but i CAN guarantee that not taking action to re-establish credit will significantly hinder the chances of qualifying in the future. The BEST way to re-establish credit is through secured credit cards. This, combined with managing credit, will make a huge difference in the shortest amount of time possible.