credit cards

Credit Card Basics

CREDIT CARDS:

Credit cards allow you to buy now and pay later. This is a form of borrowing and is often termed as consumer credit. With a credit card, you have the option of paying for a purchase over time by making minimum payments. (This is very costly and not recommended). When you are approved for a credit card, you will be given a credit limit. This is the maximum amount of borrowing you are allowed without paying fees. Your goal with credit card use should be to pay the balance of your credit card off in full every month. Making monthly payments toward a credit card to pay it off is very costly. #GOAL$

CONVENIENCE USER vs. BORROWER

When considering your personal use of credit cards, are you a convenience user of credit or a borrower? In other words, if you choose to use a credit card when going to the grocery store or gas station because you prefer this to cash, and you pay your credit card balance off in full each month, you are likely a convenience user. GREAT! However, if you rely on your credit card to pay for groceries or gas and are unable to pay the balance off in full at the end of the month, you are a borrower. Check your budget as this is an indication that you may be spending more than you make. #REDFLAG

DID YOU KNOW?

Credit card companies report your utilization ratio (the percent of what you owe divided by your credit limit) and payment history to the three credit report agencies. In other words, your use of a credit card impacts your credit score.
Responsible use of a credit can and will improve your credit score. Why? Because it demonstrates your ability to repay money you have borrowed. But be careful. If your card balance exceeds 30% of your credit limit, it will negatively impact your credit score!
Many credit cards offer a reward program. For example, Discover Card offers 1% cash back on all purchases and a bonus tier of 5% cash back on pre-specified categories each quarter.

DEBIT CARDS:

Debit cards can be used like credit cards, but they are linked directly to your bank account. The money required to make a purchase is pulled directly out of your bank account at the time of purchased. If you exceed the available cash in your account, the end result will be an “overdraft” which includes fees.

DID YOU KNOW?

Your debit card has no impact on your credit score. The use of your debit card is not reported to the credit reporting agencies and therefore, using your debit card does not help build a credit score.
If you use a debit card regularly, ask your bank about “overdraft protection.”
Very few debit cards offer a reward program for purchases.

Are you liable if someone steels your card?

Credit card vs. debit card:

Credit card:

The Fair Credit Billing Act protects consumers from loss associated with a stolen credit card. If the thief stole and used the physical card to make the purchase, the issuer can't hold you liable for more than $50 in fraudulent charges. (12 C.F.R. § 1026.12). If the thief stole the number, but not the card, you have no liability. You have 60 days from the billing cycle showing unauthorized use to report your claim.

Debit card:

The federal Electronic Fund Transfer Act (15 U.S. Code § 1693g) protects consumers from loss associated with a stolen debit card. You may be liable up to $50 if you notify the bank within two business days after you realize the card is missing or up to $500 if you fail to notify the bank within two business days after you realize the card is missing. And your liability may be unlimited if you fail to report within 60 days.

Frequently Asked Questions

Do you have a question? Email Dr. Griswold at melissagriswold.irvine@yahoo.com and your question may be answered below!

First Question: I have too many credit cards! Should I cancel them? How many should I cancel?

Be careful closing credit card accounts as closing an account eliminates the payment history and length of history associated with this account. Cancel newer cards first and cancel cards with less payment history associated with the card. Cancel cards gradually over time and do not open additional cards! Your end goal should be no more than four or five credit cards. Why? Because you need to actively monitor each credit card. And let's be honest, it can be tempting to spend too much when you have credit available!

Second Question: I couldn't resist getting 10% off at Target so I entered my social security number and I think I may have a Target card, but I have never used it. Does that hurt my credit score?

This type of credit card is known as a retail credit card or store card. It is a real credit card and it impacts your available credit capacity and therefore your credit score. Even if you have not put purchases on the credit card, it will likely be listed as an open account on your credit card. Pull your credit report and verify that the card is listed as an open account. Close the account and don't fall for this scam again!

Third Question: I am a college student and I do not have a credit card. Should I get one? If yes, do you have a suggestion?

Can you be trusted with a credit card? Can you overcome the temptation to spend more than you make? If you are a disciplined person, having a credit card can help build your credit score! But you simply must use it with caution and keep the card paid in full each month.

I like the Discover It card for college students because it has no annual fee and it will provide you with your credit score each month. However, you may want to check with your bank. For example, Bank of America has a student credit card and getting approval for a credit card may be easier at a bank where you have history. Whichever card you choose, never pay an annual fee and always make sure you are earning "cash back" points in some form. After all, little savings add up.