~ Robert Orben
Credit is a vital part of our way of life. Without good credit, it isn’t possible to finance a real estate purchase, a car purchase, and in many cases, a college education. In fact, some seemingly simple things, such as renting a car or a hotel room, aren’t possible without the use of a credit card.
For this reason, it’s necessary to learn exactly how to maneuver through all of the possible credit options available to you. However, simply jumping into the vast realm of credit without any background knowledge isn’t a smart idea – it’s a rather ill-advised move, frankly.
But, once you’re educated about the various sectors of consumer credit, you’ll be able to make wise decisions about your money. And in many cases, you’ll be able to turn a money-making situation for the creditor into a money-making situation for you!
A loan is a loan. But, a loan with no interest rate and cash back rewards is free money! If this sounds like a sweet deal, it’s because it is. And, with the knowledge you’ll gain below, you’ll learn how to score equally impressive deals. Or, at the very least, minimize your out-of-pocket expense.
Types of Credit Cards
Money is just the poor man’s credit card.
~ Marshall McLuhan
There are various types of credit cards on the market. However, it’s important to choose the credit card that best aligns with your goals and current financial situation. Below, we’ll discuss the most common types of credit cards and why they may (or may not) be best for you.
Secured Credit Cards
For the most part, a secured credit card works just like a standard credit card. You can pay for purchases and choose to pay the minimum payment at the end of the month, fork up the entire balance, or an odd amount in between.
However, secured credit cards differ from standard credit cards in that you must send a deposit to the creditor before being granted an account. This deposit acts as collateral to the creditor and assures them that you’ll be less likely to default on your payments.
The amount of deposit you put down as collateral is the amount that your credit limit will be. Therefore, if you place an $800 deposit, your credit limit will be $800. If you place a $350 deposit, your credit limit will be $350.
Overtime, if you’d like to increase your credit limit, you simply do so by putting down an additional deposit. For example, if you’d like a $2,000 credit limit and you only placed an $800 deposit at the inception of your account, you’ll need to fork over an additional $1,200.
However, with a proven track record of on-time payments and responsible use, you may be granted a credit increase without the need to place an additional deposit.
Who it’s for: Someone with low or no credit. A secured credit card can help you establish or rebuild your credit.
Drawbacks: Handing over $250 to $1,000 or more before even being able to use your credit card can be a tough pill to swallow. However, if you have bad credit, a secured credit card is often the only way to be approved for credit.
Who offers this type of card: Banking institutions, such as First Premier Bank, Orchard Bank, Citi Bank, Wells Fargo, HSBC, Chase and Wachovia Bank are the most notable providers of secured credit cards.
Available Credit Cards: MasterCard and Visa both offer secured credit cards. However, Discover and American Express do not.
Unsecured Credit Cards
An unsecured credit card is considered to be a standard card. When you apply for an unsecured card, you aren’t offering assets or making a down payment as collateral to ensure that you’re “good for the money.” Your approval, or lack thereof, for an unsecured card is dependent upon your credit score and credit history.
An unsecured credit card requires no initial out-of-pocket expense to attain your credit card. But don’t be surprised if 50% to 75% of your limit has already been used by fees charged by your creditor.
Banking institutions often charge application fees, processing fees, setup fees and maintenance fees to your account before even handing you your card. It isn’t uncommon to be approved for a $250 credit line and only have $50 to $75 worth of available credit because the bank has used up the better part of your credit line in fees.
Though there’s no way to completely avoid these fees, you can drastically reduce them by simply doing a bit of legwork. Applying to just any card offer that’s sent to you in the mail will more than likely land you a card with outrageous fees. Apply to credit cards online by using websites, such as www.creditcards.com to find the best card for you.
Who it’s for: Unsecured credit cards are ideal for someone who already has a credit history and has attained a minimum of fair credit.
Drawbacks: Possible high setup fees, especially in offers to those with low credit scores.
Who offers this type of card: Almost any banking institution offers unsecured credit cards, as an unsecured card is considered to be a “regular” card. National giants, such as Chase, Bank of America and PNC Bank among others, offer the best introductory incentives.
Available credit cards: MasterCard, Visa, Discover and American Express all offer unsecured credit cards.
Store Credit Cards
Many big box stores and mail-order catalog companies offer credit cards for in-store use only. This proves to be convenient for the customers, as they can simply pay $20 per month for a large purchase, rather than the full sum upfront. And it also increases customer retention and purchase activity from existing customers, hence increasing the store’s revenue. So, it’s a win-win offer.
Like all credit cards, store credit cards also charge interest rates and processing or financing fees. However, such is the price of convenience. The payment plans and policies vary by store. However, most have payment plans that allow you to pay off your purchase for less than the cost of two Starbucks lattes.
The price of your purchase determines what your monthly payment will be. For example, Ginny’s Home Catalog allows you to pay just $20 per month on a $200 purchase. And, Fingerhut allows you to pay less than $10 per month on a $110 purchase.
Who it’s for: A store credit card is ideal for someone who plans to purchase a high-ticket item or make the majority of their purchases at just one store.
Drawbacks: Some stores charge above average interest rates.
Who offers this type of card: Macy’s, TJ Maxx, Victoria’s Secret, Fashion Bug, Saks Fifth Avenue, Gap, Kohl’s, JCPenney, Fingerhut, Ginny’s, and Seventh Avenue.
Available Credit Cards: Visa, MasterCard, Discover, and American Express have all partnered with at least one retailer to produce a store credit card.
If gas is a big chunk of your monthly budget, you may benefit greatly by having a gas card. Gas cards often give you cash back for your gas purchases. The most popular gas cards offer cash back for one specific gas station (such as Sunoco, BP, Shell). However, gas cards which offer cash back at any gas station are also becoming increasingly common.
Gas cards which offer cash back on your purchase at an assortment of gas stations tend to offer lower reward points and cash back. This is generally because it isn’t possible for the creditor to have as strong of an affiliation with 100 gas station chains, as it would by promoting your purchase at a particular brand.
Though chain-specific rewards programs offer higher incentives, they’ll do little good if the reason you’re getting a gas card in the first place is to lessen your expense on a road trip. Your chosen brand may be popular in your state or region, but may have no stations in other states. However, if you’re getting a gas card for day-to-day use within your state, chain-specific cards will offer higher cash back and rewards.
Who it’s for: Consumers who wish to save money on gas and are committed to paying off their balance at the end of each month.
Drawbacks: If you maintain a balance on your gas card, the rewards you receive are nil as the amount you will pay in interest will counteract your savings.
Who offers this type of card: BP, Sunoco, Texaco, 7-Eleven, Mobile, CITGO, Valero, Shell, and Turkey Hill, among many others, have gas cards.
Available Credit Cards: Visa, MasterCard, Discover, and American Express have all partnered with at least one gas chain in order to produce a gas card.
Campus life makes it a near requirement for a student to have a credit card. Purchases ranging from necessities to random pizza runs, require either cash or credit. And, generally, having an abundance of cash on-hand is a rarity for students.
With that said, student credit cards boast some of the highest interest rates offered. Yet, the credit limits are often low (less than $1,000). By simply taking a few hours to search for the lowest interest rates offered with student credit cards online, you can potentially save yourself hundreds of dollars over the course of your college days.
Alternatively, if you’d like to avoid the high interest rates for student credit cards, you may consider asking your parents to place you as a cardholder under their account. Or choose the less fun, but safest, option – sign up for a debit card and pay for your expenses as you go.
Who it’s for: Students with no credit history.
Drawbacks: Because extending credit to students is considered a major risk for creditors, high interest rates are associated with student credit cards.
Who offers this type of credit card: Most banking institutions offer student credit cards. Additionally, you can apply for one directly on the creditor’s website (such as www.MasterCard.com or www.Visa.com).
Available Credit Cards: Visa, MasterCard, and Discover offer student credit cards. American Express, however, does not, as their standard for acceptance is quite high in terms of credit score and annual gross income.
Prepaid credit cards act more as debit cards due to the fact that no credit is involved. You’re only able to use your prepaid card when you load money onto the card.
In order to make hotel reservations or rent a car, you need a credit card. Prepaid cards allow you to enjoy the small perks of having a credit card without it actually being so.
Prepaid cards allow you to directly deposit paychecks onto the card. For teens and the elderly, sifting through bank statements, deciphering fees and decoding the complex fiscal speak can be daunting. For this reason, prepaid cards are becoming an increasingly common alternative for individuals in these age groups.
Who it’s for: Individuals who like to pay as they go and those who prefer to avoid credit agencies and banking institutions.
Drawbacks: Prepaid cards are laden with fees. Some fees are one-time; others are recurring monthly or annual fees.
Who offers this type of card: Visa’s Rush Card is a well-known prepaid credit card, as are Green Dot reloadable cards and MasterCard’s Mango card.
Available Credit cards: Visa, MasterCard, and Discover offer prepaid cards. American Express does not. However, they do offer gift cards loadable up to $500.
Rewards programs have always been an attractive feature about credit cards. However, it seems that, especially because of the sliding state of the economy, customers are cashing in on those once-forgotten credit card rewards programs.
Some of the most popular reward offers are cash back, airline miles, and free gifts. However, more recently, rewards programs are including “practical points,” from American Express, which allows users to redeem rewards for practical purchases, such as groceries, utilities, gas, and home appliances.
Citi offers a rewards program which allows users to use reward points towards mortgage payments. And Capital One and HSBC allow users to redeem their points and give them to charities.
While all of these incentives surely are appealing, they’re worth nothing if you don’t know how to handle your card efficiently. In order to maximize your rewards, you must be willing to pay off the balance of your credit card at the end of each month. If you don’t, you accrue interest, which works against any savings or rewards you would have accumulated.
Who it’s for: Individuals who use their credit cards frequently and are able to fully pay off the credit card balance at the end of each month.
Drawbacks: Some might consider the fact that the rewards are greatly lessened if the balance isn’t fully paid off each month a detriment.
Who offers this type of card: American Express offers the most generous rewards. However, Discover, Master Card, and Visa all offer rewards cards.
Business Expense Cards
It’s a given – when you run a business, you’ll encounter unexpected expenses. A business expense card can help you manage those expenses, or at the very least offset their initial burden.
Not only can business expense cards be used for just about any purchase needed to operate your business, but also, many credit cards offer rewards on every dollar you spend. But keep in mind, the rewards may be great, but business credit cards often boast high interest rates.
An expense card can help build your business’ credit. This can come in handy down the line when applying for small business loans, lines of credit, or for a higher limit on your current cards. Of course, managing the card meticulously is the only way to truly be able to use the card to your advantage.
Who it’s for: Small businesses that would like to streamline the outgoing cash flow.
Drawbacks: You may be asked to provide your personal credit history and social security number in order for the creditor to gauge whether you’re a desirable candidate. And if the business defaults frequently on the expense card, your personal credit will also take a hit.
Who offers this type of credit card: Banking institutions and major creditors offer business expense cards. You’ll be able to get a better rate with an institution that you’ve built a rapport with.
Available Credit Cards: Visa, MasterCard, Discover, and American Express all offer business expense cards.
The creditor hath a better memory than the debtor.
~ James Howell
When you place an item on layaway, you place an initial deposit (usually 10%) and then proceed to make payments to the store over time. While the payments are being made, the item remains securely within the store. This is simply to minimize the risk to the retailer, in order to ensure that customers won’t simply take the item home and refuse to make future payments.
For example, if you put a television that costs $500 on layaway during the first week of October, you may need to put down a 10% deposit and make a minimum payment of $50 with every payment thereafter.
However, it’s important to note that your payment isn’t capped at $50. And often times, only one payment needs to be made per month, or the store may allow you to make payments at your discretion as long as the item is paid off within 12 months.
Therefore, if you make a $50 deposit on the first day of your layaway term and decide to make weekly installment payments of $50 every week thereafter, you’ll be able to take the television home the first week of December, when you make your last payment.
Where to Find Layaway Plans
Furniture stores are notorious for offering layaway plans. Also, big box stores, such as K-Mart, Burlington Coat Factory, TJ Maxx, Toys-R-Us, and Marshall’s offer layaway plans to their customers.
Most recently, Wal-Mart did away with their layaway plan. However, it’s expected that the resurgence of mainstream layaway will ensue, at least temporarily, for the holiday season, in hopes of attracting more customers during their most profitable time of year.
Consider these benefits of layaway:
• Flexible terms
• Ability to lock in an unusually low price and pay for the item over time
Layaway allows you to work actively towards purchasing an item by paying it off incrementally. Because you don’t physically get to take the product home with you until it’s paid off, some people believe that layaway is simply a waste of time – setting the money aside in a savings account will do much of the same for less hassle.
However, few people actually possess the will power to save money, have it at their disposal, and not touch it until it’s ready to serve its purpose. Psychologically, layaway allows you to feel as though you’re accomplishing something, rather than just setting the money aside and hoping that you’ll eventually meet your goal.
Another benefit of layaway is that you’re able to lock in sale prices and the ability to pay for the item over time rather than issuing one lump sum payment.
The Bad and the Ugly
However, there are also drawbacks of using layaway:
• If the company goes out of business, they keep your money and the product.
• Most stores refuse to return payments to customers who choose to opt out of the layaway program.
For the most part, layaway is a perfectly safe practice. However, if a store gets rid of their layaway program or closes its doors, the retailer may keep both your money and your item. In order to protect yourself, become familiar with the company’s layaway policy before you put down a deposit.
Stores are flexible as to when you can make payments towards the items. However, they’re not so eager to let you out of your layaway plan free-and-clear if you decide that you’d rather not purchase the items.
Some stores won’t refund your deposit, but refund any additional payments made towards the item. But, the most common practice is to simply keep your nonrefundable deposit plus all payments made towards the purchase.
The only reason I made a commercial for American Express was to pay for my American Express bill.
~ Peter Ustinov
Do you see a new car in your near future? Buying a new car can be confusing, especially when it comes to your choices in financing. After all, every car salesman you meet with is likely to tell you that they have the very best deal. However, before you begin the application process, it’s important to know how to secure the best loan for you.
Methods of Applying
Heading to a bank after visiting the dealership is the most traditional way of applying for an auto loan. But, it’s also the method that requires the most effort and anxiety on your behalf.
First, you must visit the car dealership, fall in love with the car you’d like to buy, log its information, and then walk out of the lot without knowing whether you’ll be approved for the loan by the bank. This is where the anticipation begins.
Then, you must make an appointment with a loan officer at your bank and provide him with both your information and the information of the vehicle you’d like to purchase. Not only is your credit score being put on the chopping block, but so is the price you’re being quoted for the vehicle.
The bank must verify the blue book value of the car, and if the price you’re quoted is too high, you’ll either be approved for the blue book value of the of the vehicle, or worse, nothing at all.
If you’re approved for less than the price you’ve been quoted, you must then go to back to the dealership and try to haggle down the price, be prepared to put down a down payment that will make up the difference, or simply walk away from the vehicle.
For these reasons, it may be best to choose one of the two options mentioned below.
Securing a Loan Through the Car Dealership
Applying for an auto loan directly through the car dealership you intend to purchase from streamlines the process of potentially securing a loan. You simply choose a car that you like, walk into the office, and give your information. The dealership and/or manufacturer will determine whether you’re eligible for an auto loan and the interest rate you qualify for through their financing department.
In addition, if you’ve previously bought or leased a car from the car dealership, you’ve built rapport with the company. Therefore, you’ve proven your ability to pay on time, and, in turn, increase your chances of securing a rock-bottom interest rate.
Taking out a Personal Loan
If you have stellar credit, taking out a personal loan should be fairly simple. You simply apply for the loan and, based on your credit score, the bank will determine the dollar amount you’re qualified to receive. So you can pre-qualify for your car loan.
This minimizes the guesswork because you’ll go into the dealership with a predetermined, concrete budget. And this also allows you the flexibility of purchasing a used car from a private seller without having to pay directly out-of-pocket.
If approved, the bank will simply deposit the amount into your checking account or send it to you in the form of a certified check. In addition, your personal loan may be an unsecured loan; thus the need for using the car as collateral is eliminated.
However, do note that unsecured loans often call for higher interest rates, as the bank incurs more risk by approving personal loans.
Tip: New cars generally qualify for a lower interest rate than certified pre-owned or used vehicles. Nevertheless, a new car loses 70% of its value within the first four years.
The one thing that unites all human beings, regardless of
age, gender, religion, economic status or ethnic background,
is that, deep down inside, we ALL believe that we are
above average drivers.
Bank loans can be used to finance a wide variety of purchases, including a real estate purchase, a car, boat, or other personal or business expenses. However, regardless of the type of loan or loan amount you’re seeking, it will fall in one of two categories – a secured loan or an unsecured loan.
An unsecured loan is a loan that requires no collateral in order to qualify. With an unsecured loan, the determination as to whether the bank classifies you as an ideal candidate is based strictly upon your credit history and credit score.
If your credit score is less than desirable, you may still be approved for a loan, but your interest rate will likely be higher and you may also be approved for less. In order to minimize the interest rate for an unsecured loan, having a worthy cosigner on the application will likely lower your interest rate significantly.
Now on the other hand, a secured loan is quite the opposite. A secured bank loan requires that an asset be placed as collateral in order to prove to the bank that they’ll be able to recoup their monetary investment in some form or another if you were to default on your loan.
In car loans and home loans, the home or car is listed as collateral. This is the reason for foreclosures. If a home is being foreclosed upon, the owner of the home still has an outstanding balance on the mortgage and is delinquent on payments. Therefore, because the home has been used as collateral, the bank may foreclose on the home and sell it to someone else in order to recoup their investment.
Much the same applies for vehicles, as delinquent payments are the reason that the bank can repossess the car and auction it off to a new buyer.
Generally, secured bank loans carry lower interest rates because the bank assumes less risk. However, an unsecured loan can receive an equally appealing interest rate if the prospective borrower has an excellent credit score.
1. Approval for an unsecured loan is based upon your credit.
2. A secured loan requires collateral for an applicant to be considered.
3. Secured loans often carry lower interest rates.
Lines of Credit
Money is just the poor man’s credit card.
~ Marshall McLuhan
A line of credit differs from a standard loan in that a predetermined maximum borrowing amount is set at the inception of the inquiry. However, a borrower can borrow money at their discretion, rather than taking out a loan for the entire maximum.
For example, if a bank grants a small business owner a $35,000 line of credit, the borrower may choose to take out a $5,000 loan within a few months to pay for the repair of equipment. Then, down the line, the borrower may choose to take out another $7,000 to pay for miscellaneous expenses. And later, the borrower may choose to take out the remaining $23,000 to renovate their shop.
Essentially, once you’re granted a line of credit, you can take out loans in amounts and time periods as you choose, as long as you don’t exceed the maximum line of credit you’ve been granted.
The main benefit to having a line of credit rather than a traditional loan is that you can take out small loans on an as-needed basis. Therefore, it’s possible to pay off the borrowed amount in its entirety before even taking out your next loan from the allotted line of credit.
By doing so, you greatly decrease the amount of interest paid at any given time. If you were to take out a $5,000 loan at a 5% interest rate, you’d have to pay considerably less in interest than if you were to take out a lump sum loan of $50,000 at the same interest rate.
Types: Home equity line of credit, small business line of credit, personal line of credit.
The safest way to double your money is to
fold it over and put it in your pocket.
~ Kin Hubbard
A payday loan, often referred to as a cash advance loan, is intended to cover the emergency expenses of a borrower until his next payday. The loan is granted on a two-week basis, and is intended to be repaid upon the arrival of the borrower’s coming paycheck.
Payday loans are predatory because the interest rates are extremely high. In fact, some states have no cap. However, the states that do have caps hover in the range of 10% to 75% of the loan, payable by the borrower’s next paycheck.
Therefore, if you borrow $500 at a 75% fee, you’ll have to pay back $875 by your next paycheck. These predatory rates lead to repeat borrowing, as most often loans are renewed the same day the last payday loan is paid.
Fifteen states have taken a stance against this unethical lending practice by making payday or cash advance loans illegal in their states. The states that have made payday lending illegal are as follows.
8. New Hampshire
9. New Jersey
10. New York
11. North Carolina
15. West Virginia
Regardless of the type of emergency, a payday loan should be a last-resort option. If possible, simply scrimp and save until your next paycheck arrives. Or borrow money from friends and family members and pay back the amount by your next paycheck – free of exorbitant interest.
1. Payday loans have high interest rates and fees.
2. The loan must be paid back with interest by your next paycheck.
3. Payday loans should be a last-resort option.
If you see a bandwagon, it’s too late.
~ James Goldsmith
Before applying for any type of credit, it’s important to learn the ins-and-outs of the terms of the loan or credit offer. Without even realizing it, many people take on more than they can chew, and this is where the seemingly never ending cycle of debt begins.
Credit can be a useful asset to your finances. When managed responsibly, it can help you build your good credit even further, which in turn helps you qualify for attractive mortgage and car loans down the line.
The bottom line is that too much of a good thing can turn a sweet deal into a sour mess. But, if you’re responsible with the credit you’re granted and treat it as carefully as if it were your cash (or as if you were the one doing the lending), you’ll be just fine.