Frequently Asked Questions
Credit Scores
What is a credit score?
What are some of the new trends in credit scoring?
Who uses credit scores?
How are credit scores calculated?
What are the differences in each country?
How is it related to building wealth?
What is a good score?
How do they vary by state?
What does not go into my credit score?
General Credit Card Facts
What is a Credit Card?
What is a Credit Limit?
What is a balance transfer and/or balance transfer rate?
How much am I liable for if someone uses my credit card without my permission?
What is an introductory (or intro) APR?
Can my credit card company change my rate?
Payments and Fees
Am I responsible for paying interest and fees?
What is an annual fee?
What are payment dates?
What is the minimum payment?
What is a finance charge?
What is a grace period?
What is a default rate?
What is a cycle date?
What is an Annual percentage rate (APR)?
What are late charges?
What are over-the-limit fees?
What are the required payments and finance charges?
What is an instant approval or instant decision credit card?
What is a balance transfer fee?
Card Types
What is a prepaid card?
What is an "unsecured" credit card?
What is a "secured" credit card?
What is a "cash back" credit card?
What is a "rewards" credit card?
What is a fixed APR credit card?
Credit Scores
Credit scores are mathematical calculations that use data compiled from customer application information and third party data bases to predict the likelihood that a borrower will repay a loan. Generally, credit scores developed by Fair Isaac Corporation (“FICO”) range from 350 to 800, and those developed by VantageScore range from 501-990. Additionally, each credit bureau has its own proprietary score. With all of them, the higher the number, the lower the risk. A credit score is important to your financial well being because higher scores generally result in lower costs for consumers for a wide variety of financial products, access to certain types of employment, the ability to open a bank account and the availability of utility service.
What are some of the new trends in credit scoring?
The most common type of credit score is the FICO score. It and other scores are calculated by the credit rating agencies based upon information gathered from credit card issuers, utility companies, public records and phone companies. More recently, new credit reporting agencies have been formed to capture more non-traditional payment information from companies such as payday lenders, consumer finance companies, title pawn and other sub-prime companies that have not traditionally reported to the big-3 credit bureaus (Equifax, Experian and TransUnion). The reporting of bill payments and rental payments has also emerged as a growth category to allow consumers with little or no credit history to demonstrate the history of their timeliness of payment so that they can access mainstream financial services.
Credit scores are increasingly used by a growing number of companies for reasons centered around the assessment of risk. Credit scores are primarily used by lenders and creditors to predict how likely you are to pay your bills in a timely manner. More recently, insurance companies have begun using credit scores to price auto policies as scores have been demonstrated to accurately predict the probability of an accident. Employees in financial services and other industries involving the handling of money regularly review credit scores and credit reports for responsible money management prior to making a hiring decision. Utilities also use credit scores to determine if they will establish service without a security deposit and apartment landlords review.
How are credit scores calculated?
Credit scores are determined using mathematical formulas that predict risk. The data used in the calculation of the formulas can be summarized as follows:
a. Payment History - Repayment behavior, including timeliness, the incidence and severity of delinquency, and the presence of charged-off accounts, plays the largest role in calculating a score.
b. Utilization of credit - This reflects the amount of credit outstanding (owed/used) relative to the total available credit.
c. Depth of Credit History - The depth and type of credit in your credit bureau file. The more information a bureau has on your payment patterns, the more certain they can be about future payments performance.
d. Balances - The amount of current and delinquent balances.
e. New Credit - New and recently opened credit accounts, as well as inquiries, weigh against you.
f. Your place of residence, age, sex or other possibly discriminatory factors do not play into the calculation of the score.
What are the differences in each country?
The use of credit bureaus and credit scores vary dramatically from country to country. Credit scores are deeply rooted in use in the United States, Canada, Australia and the United Kingdom. Economic studies have concluded that the use of credit scores has resulted in lower prices for consumers over time. As a result, the use of credit scores has expanded into more developing countries such as India and the reliance on them is expected to accelerate rapidly in the coming decade.
How is it related to building wealth?
Lenders use credit scores to approve or decline credit. Studies have shown that having access to credit specifically, and capital in general, has resulted in the increase of wealth. Banks also assign prices based upon credit scores. The lower the cost of credit, the higher the availability of cash to put into savings.
Scores are different by credit bureau because each bureau has different data in the credit reports. Therefore, the average credit score is different across the three bureaus; however, generally reported averages range from 680 to 710. Generally speaking, a good credit score would be anything above the average while a bad score would be anything below the average. Specifically, we can determine bad credit scores by two additional data points: FDIC guidance and conventional mortgage cut-offs. The FDIC specifically states that a bad score is anything below 660 and requires banks to hold more capital on their books. Therefore, a bank lender making a loan to a consumer with a rate below 660 will either decline the loan or charge a higher price for the risk. Second, Fannie Mae and Freddie Mac will not typically buy mortgages that have FICO scores below 620, therefore, making those loans more expensive.
Credit scores differ by state fairly dramatically. Credit scores are also highly correlated with income and the availability, or lack thereof, of credit and the type of credit available.
What does not go into my credit score?
The first step in improving your credit score is to ensure that your credit reports are accurate. To do this, you need to get a copy of your credit report. You are entitled by law to get one free credit report per year from each of the three US credit bureaus (TransUnion, Equifax, and Experian). Laws differ in other countries but the same rule of thumb applies: review your credit report to make sure it is accurate. You can get your report by mail, phone or the internet. Contact information is as follows:
Call 877-322-8338 or log onto www.annualcreditreport.com.
If you want to see your credit score, you must purchase that from FICO or the credit bureaus. Send to sale of credit score.
Experian: www.experian.co.uk
Experian
Talbot House
Talbot Street
Nottingham
NG80 1TH
United Kingdom
To order a report: 0844 481 8000
For all other inquiries: 44 (0) 115 941 0888
Equifax: www.equifax.co.uk
Equifax Credit File Advice Centre
P.O. Box 1140
Bradford
BD1 5US
To Report Fraud: 0870 010 2091 for the CIFAS Protective Registration Service
Call Credit: http://www.callcredit.co.uk
Callcredit Limited
One Park Lane
Leeds
West Yorkshire
LS3 1EP
Phone: 0113 244 1555
Once you get your report, start by verifying that your name, current address and NIN# are correct
You should also then look at any public records to ensure accuracy. This would include:
- Bankruptcy
- Tax liens
- Suits
- Judgments
- Charge offs
- Inquiries
- Assignments
- Past due foreclosures
Check for inquiries: Make sure that no "hard inquiries" are posted to your file that you may have not applied for.
General Credit Card Facts
A credit card is a piece of plastic the size of a business card that contains identification information such as a signature, that authorizes the person named on it to charge purchases or services to his account. A credit card is a type of a loan. When you use your card you are borrowing money from the credit card company to make a purchase or take a cash advance. Just like a loan, you have to pay back the money you borrowed and have to pay interest and fees on the loan for the convenience of using the card and the benefits it offers. A majority of consumers have at least one credit card and many have at least three cards.
A credit limit is the total amount you can borrow, usually including fees. If you show good payment history over time, your card lender may increase your credit line. Credit Limit is a term often also called a credit line. If you charge over your credit limit you may be charged an over limit fee.
What is a balance transfer and/or balance transfer rate?
In the most basic terms, a balance transfer is a way of moving a debt from one credit card to another credit card. This is often done to save money, as the new credit card may have a lower finance rate (APR) than the old credit card.
Occasionally, credit cards have promotional balance transfer rates that typically last from 3-12 months. A "balance transfer rate" is the rate (APR) that is attached to balances transferred to that card from another card. This "balance transfer rate" may differ from the rate (APR) that is attached to new purchases made with the card.
Every credit card is a bit different and promotional offers often change, so be sure to thoroughly look over the terms and conditions for each specific card before applying.
How much am I liable for if someone uses my credit card without my permission?
You are not responsible for any amount charged on your account after you have notified the card issuer that your card has been lost or stolen.
What is an introductory (or intro) APR?
An introductory annual percentage rate (APR) is a temporary APR that typically changes to a higher rate after the intro period (typically 3-12 months). Many people make use of these promotions to make a large purchase (or purchases), which they can then pay off in a series of months.
Some credit cards have an intro APR attached to only purchases, some have an intro APR attached to only balance transfers and some have an intro APR attached to both balance transfers and purchases.
Every credit card is a bit different and promotional offers often change, so be sure to thoroughly look over the terms and conditions for each specific card before applying.
Can my credit card company change my rate?
The federal Truth in Lending Act requires that written notice of a change in terms must be in mailed or delivered to the cardholders at least 30 days prior to the effective date of the change, unless you agreed to an increase in the rate when you signed up for the card. It might be time to shop for a card with better credit terms.
Payments and Fees
Am I responsible for paying interest and fees?
A card issuer may charge a variety of interest and fees. It is your responsibility to understand what the fees are and when they apply. Possible fees include an account opening fee, a monthly account maintenance fee, a returned check fee, a late payment fee, an annual fee and an over the limit fee.
An annual fee is a yearly charge for the use and privileges offered by the card. Depending on a consumer's credit rating and the benefits associated with the card, many companies offer "no annual fee" cards.
Your credit card company needs to receive your payment on or before the date the payment is due, often before a specific cut-off time.
The minimum payment is the least amount of money you are required to pay on a monthly base. You will be charged a late fee and may be moved to the default rate when you miss a payment.
The pound amount you pay to use credit based upon the applicable annual interest rate. Finance charges often do not include other fees. Other feed may include cash-advance fees, which are charged to your card when you take cash using the card. You generally pay higher interest on cash advances than on purchases.
A grace period usually lasts about 25 days, during which time you can pay your credit-card bill without paying a finance charge. The grace period usually only applies if you pay your balance in full each month. It does not apply if you carry a balance forward. Also, the grace period does not apply to cash advances.
A default rate is the higher interest rate you pay on a credit card if you miss one or more payments. It can take months of on-time payments to get yourself out of default rate pricing and some creditors do not lower the default rate at all.
Generally, this is the day of the month around which your statement was created. You will usually have about two weeks after this date before your payment is due, but check the specific terms and conditions for the card to see the exact amount of time you'll have to make a payment.
What is an Annual percentage rate (APR)?
The yearly percentage rate of the finance charge.
Late charges usually range from £15 to £40 and are increasingly tiered based upon the severity of the delinquency.
Over the limit fees usually range from £15 to £40 and are increasingly tiered based upon the severity of the over-limit.
What are the required payments and finance charges?
Some credit cards or charge cards require you to pay off all of your charges each month. As a benefit, they usually have no finance charge, and sometimes no maximum limit. Most cards, including Visa, MasterCard, and Discover offer a revolving line of credit. This means they let you carry a balance, on which they charge interest, finance charges, and they require you to make a minimum payment. The minimum payment is usually about 3 to 5 percent of your current balance or £10 -- whichever is more.
There are a number of ways lenders calculate finance charges:
- Adjusted balance method - New charges are added to the balance from your previous statement and the payment is subtracted. This number is then multiplied by the monthly interest rate.
- Average daily balance - The balance is tracked day-by-day, adding charges and subtracting payments as they occur. At the end of the period, they compute the average of these daily totals and then multiply this number by the monthly interest rate to find your finance charge.
- Previous balance - The issuer multiplies your previous statement's balance by the monthly interest rate to find the new finance charge. This means you're still being charged interest on your balance an entire period after you've paid it down!
- What you pay will vary depending on your balance, the interest rate and the way your finance charge is calculated.
What is an instant approval or instant decision credit card?
Certain credit cards offer instant response (or instant decision), otherwise known as instant approval, to people applying for the card. With these credit card offers, you should be able to find out if you have been approved for that particular credit card or not in a matter of minutes.
However, certain circumstances do occasionally arise in which the credit card issuer will need more time to determine if you are approved for the specific credit card or not.
It is not guaranteed that you will receive an instant decision with these credit cards. However, these credit cards do offer this feature in most cases.
What is a balance transfer fee?
A fee charged by a credit card company to transfer a balance from another account to that particular credit card. It is generally 1% to 5% of the transferred balance (sometimes up to a certain dollar value). For example, a balance transfer fee could be 3% of the transferred balance up to a maximum of £50. Not all credit cards charge this fee.
Card Types
Prepaid cards allow users to enjoy the benefits of a Visa, MasterCard or American Express card, but require the account holder to deposit funds into a prepaid account that serves as the availability of purchasing power on the card. Prepaid cards are not credit cards. Prepaid cards act like credit cards but, in reality, are more like debit cards. These types of cards have many benefits, including: No finance charges, easy budgeting, avoiding debt, etc.
With prepaid cards, the cardholder determines the credit line. Generally speaking, a cardholder's credit line depends on how much money he/she transfers to the card. Therefore, there is little risk of running up credit card debt, while budgeting is made easier.
Although most prepaid cards do not charge finance fees, other fees may apply, including: monthly fees, startup or application fees, over limit fees, ATM fees and more. Be sure to thoroughly look over the terms and conditions for each specific card before applying.
What is an "unsecured" credit card?
Unsecured credit cards are not secured by collateral. Customers qualify based on credit history, financial strength and earnings potential.
What is a "secured" credit card?
Secured credit cards require collateral for approval. With secured credit cards, a security deposit is needed to secure the credit card. The amount of the security deposit usually equals the credit limit for that particular credit card. Generally, secured credit cards are for people with no credit or poor credit who are trying to build or rebuild credit history.
What is a "cash back" credit card?
Cash Back credit cards give cash rewards to cardholders for making purchases with the card. A cardholder accumulates cash rewards based on the dollar amount of his/her purchases with that particular credit card over a period of time.
A typical cash back rate hovers around 1%. However, some cards offer a higher cash back percentage with increased usage and some offer a higher cash back percentage at select merchants. Many cash back cards offer cash back on purchases but do not offer cash rewards on balance transfers or cash advances.
Each cash back credit card is a bit different, so be sure to read the terms and conditions to find out what cash back percentage you can expect, whether there is a limit on how much can be accumulated in a year, etc. Be sure to thoroughly look over the terms and conditions for each specific card.
What is a "rewards" credit card?
Rewards credit cards give various rewards to cardholders for making purchases with the card. A cardholder accumulates rewards based on the dollar amount of his/her purchases with that particular credit card over a period of time.
Currently, you can find rewards credit cards that give:
- Free airline tickets
- Other travel rebates
- Automotive rebates
- Gasoline rebates
- Entertainment rewards
- And more ...
What is a fixed APR credit card?
Fixed APR credit cards carry a fixed (stable) interest rate that typically lasts for as long as you use the card. For example, if you transfer a balance to a credit card with a fixed APR on balance transfers of 10%, the APR for this balance will typically stay at this 10% level until the balance is paid in full.
In summary, a fixed APR on a particular balance lasts for the life of that balance. This differs from a variable APR, which can change over time. Some credit cards offer a fixed APR on only purchases, some offer a fixed APR on only balance transfers and some offer a fixed APR on both purchases and balance transfers. So it is possible to have, for example, a credit card with a fixed APR on balance transfers but a variable APR on purchases.
Some people choose a fixed APR credit card to ease the burden of constantly switching balances from one card to another once low introductory APRs disappear and higher APRs take over.
Every credit card is a bit different and promotional offers often change, so be sure to thoroughly look over the terms and conditions for each specific card before applying.