A credit score, simply put, is the calculated likelihood of you paying your bills on time. Therefore, the higher the number the better. A credit score is not something that you sign up for, but rather is created and tracked automatically by three ratings agencies.
While your credit score might seem like an irrelevant number today, it will play a major role in how much interest you pay to borrow money for things like a car or a house in just a few short years. A good credit score can qualify you for a lower interest rate when you borrow money, which means potentially paying thousands of dollars less in the future.
To obtain a great credit score, you need a history of responsible money management. One of the most common ways to build a credit history is by using a credit card. If you find yourself regularly using a debit card, consider talking to your bank about setting up a credit card with a low credit limit and no annual fee. Charging a debit card draws money directly from your checking account.
However, by using a credit card, you essentially borrow money from your bank and then, ideally, repay your debt at the end of the month. This difference allows banks and credit agencies to see whether or not you are a reliable person to loan money to over time. By repeatedly borrowing small sums and repaying them on time in full, you can build up a positive history of creditworthiness. Likewise, if you fail to pay your bills or are late on payments, your credit score will be lowered. If you feel ready for the responsibility of a credit card, make sure to do your research before you go to your bank to avoid gimmicks and unreasonably high interest rates.
The golden rule of responsible credit card use is to always pay your bill in full and on time each month. Credit card companies will tempt you by listing a "minimum monthly payment" on your bill. While it might seem like that is all you need to pay that month, don't fall for it. Card companies make their money from the interest they charge on your remaining balance. Know that if you only make your minimum payment, you will typically end up paying twice the sticker price of each item you buy due to interest fees. Ouch! There are also other hidden costs to carrying credit card debt. For example, late bill payments will bring down your credit score and remain on your record.
One easy way to stay on top of your payments if to set up an alert on your phone reminding you to pay your bill each month. While you will get a paper bill each month, most banks today have online banking and smartphone apps for those who don't regularly check their mailboxes. You can take advantage of these apps to pay your bill and also keep an eye on your spending relative to your credit limit. Never rely on your bank telling you if you are over or about to go over your limit, as going over may trigger fees and lower your score.
To establish good credit, try charging up a third of your credit limit and then pay it off immediately each month. While it's certainly okay to spend less than a third, regularly maxing out your credit limit may raise red flags. Another common pitfall is having too many credit cards. While companies like Nordstrom and Target might offer you a discount on your purchase if you sign up for their cards, it isn't worth it. Those cards' annual fees typically cancel out the "15 percent savings on your purchase today." Likewise, earning airline miles might seem appealing, but you generally need to charge about $8,000 annually to your card to earn one ticket every three years, which really isn't much of a deal for the average college student.
Too many credit cards can also make creditors nervous and may have negative impacts on your credit score. A good rule of thumb is to try for no more than two cards: one for everyday use and possibly one more for emergencies. History is key here, so try to keep open the account with the credit card that you've had the longest.
Finally, remember that if you ever have any questions about using your card, don't be afraid to do some research or ask your bank, as it's better to be safe than sorry. The bottom line is that a credit card is a very serious financial tool and whether it is harmful or helpful is up to you alone. With careful management of your credit card, you can start to build a positive credit history, which will serve you well in the years to come.
Photo courtesy of Creative Commons
CHICAGO (Reuters) - New technology about to be deployed by credit card companies will require US consumers to carry a new kind of card and retailers across the nation to upgrade payment terminals. But despite a price tag of $8.65 billion, the shift will address only a narrow range of security issues.
Credit card companies have set an October deadline for the switch to chip-enabled cards, which come with embedded computer chips that make them far more difficult to clone. Counterfeit cards, however, account for only about 37 percent of credit card fraud, and the new technology will be nearly as vulnerable to other kinds of hacking and cyber attacks as current swipe-card systems, security experts say.
Moreover, US banks and card companies will not issue personal identification numbers (PINs) with the new credit cards, an additional security measure that would render stolen or lost cards virtually useless when making in-person purchases at a retail outlet. Instead, they will stick with the present system of requiring signatures.
Anre Williams, president of global merchants services at American Express, cited cost and complexity as reasons for not issuing PIN numbers, which would require a much larger investment by card issuers. It is the PIN management system that takes the effort, Williams said, in part because of the additional customer support it requires.
Chip technology has been widely used in Europe for nearly two decades, but banks there typically require PINs. Even so, the technology leaves data unprotected at three key points, security experts say: When it enters a payment terminal, when it is transmitted through a processor, and when it is stored in a retailer's information systems. It also does not protect online transactions.
The simplest way to circumvent chip-and-PIN is to use a stolen card number to make an online purchase, said Paul Kleinschnitz, a senior vice-president for cyber security solutions at card processor First Data Corp.
Analysts predict that credit card fraud at brick-and-mortar retailers will fall after the introduction of chip-enabled cards, but that online fraud will rise, as has happened in other countries using the technology. Research and consulting firm Aite Group estimates US online card fraud will more than double to $6.6 billion from $3.3 billion between 2015 and 2018.
Retailers and security experts say it would make more sense for the United States to jump instead to a more secure system, such as point-to-point encryption. This technology is superior to chip-and-PIN, which first was deployed about 20 years ago, because it scrambles data to make it unreadable from the moment a transaction starts.
But the newer technology would cost as much as twice what the chip card transition will cost, and does not have the older technologys long track record.
Moreover, some security experts say that mobile payment services such as Apple Pay, a service from Apple that stores data on the cloud, have the potential in coming years to secure payments without the need to swipe or tap a card at all.
LIABILITY FOR BREACHES
The dispute over the effectiveness of dueling payment security systems offers insight into a broader battle over who bears liability for breaches: retailers or the financial firms that extend the credit.
Currently, card issuers are generally liable for fraudulent charges. After the October deadline, if a retailer is not using a terminal that can read the new cards and a security breach occurs involving a chip card, the retailer will be liable, though consumers will still deal with their banks in the event of a fraudulent charge. If the retailer is chip-and-PIN enabled, the card issuer will be liable.
The liability issue has engendered anger on the part of some retailers, but it has also provided an incentive for compliance with the new standards.
When banks and card companies are only concerned about shifting the liability to the retailer, you have to comply first, Brooks Brothers Chief Executive Officer Claudio Del Vecchio said. And then think of solutions that will fix your problems.
The clothing retailer expects to meet the October deadline, but Del Vecchio declined to give details on the cost involved.
Banks and card companies argue that chip-enabled cards are a needed first step toward defending against the use of lost, stolen, or counterfeit cards. The first thing we need to do as a country is secure face-to-face transactions, said Carolyn Balfany, senior vice-president of product delivery for MasterCard, one of the companies involved in setting the new standards known as EMV, which stands for Europay, MasterCard and Visa.
And there are reasons that banks and card companies haven't yet embraced newer, more secure systems.
A payment standard that is accepted globally will substantially reduce transaction costs for them, Rick Dakin, chief executive officer of cybersecurity risk and compliance firm Coalfire. Also they have already done the heavy lifting for EMV so they are ready and pushing for it, he said.
Dakin, who is advising a group of banks on payment security, said no industry standard exists for the newer point-to-point encryption systems, and banks and card companies are hesitant to make large-scale investments before the standards are set.
Banks and card companies said a chip card alone can make stolen data less useful for hackers and the technology has worked in reducing counterfeit card fraud in Europe and elsewhere.
Security experts said the shift cannot prevent massive consumer data breaches of the sort that recently hit Target and Home Depot. But the technology will make it more difficult to use stolen data.
With the October deadline approaching and the upgrade costs hitting retailers income statements, some merchants remain unaware of the required changes, while others have renewed their focus on the shortcomings of chip technology.
As the deadline approaches, retailers realize they are stuck with this massive investment they have to make for a technology that does not solve the problem, Dakin said.
The installation of 15 million payment terminals that can read chip cards in the US will cost approximately $6.75 billion. Banks are expected to spend some $1.4 billion to issue new cards and another $.5 billion to upgrade their Automated Teller Machines according to Javelin Strategy Research.
The upgrade of a single payment terminal to chip-and-PIN capability costs between $500 and $3000, depending on features. It would cost between $1000 and $4000 to install a point-to-point encryption terminal, security experts said.
The problem now is how do we allocate our capital in a way that addresses EMV first and then immediately find the funds to upgrade again and install a better solution, said Grant Shih, vice president for IT development at kids clothing retailer Carters Inc.
For some small merchants, however, the problem is even more basic: Knowing what will be expected of them in October.
Six of 10 small retailers in Chicago interviewed by Reuters said they had no idea about the deadline later this year and have no plans to upgrade their payment terminals. Three others said they had heard about the shift, but that their businesses were small and hadn't had problems with fraud that would justify the expense of installing new equipment. Only one business owner said she would like to upgrade terminals, though she says cost is an impediment.
Anne Manion, owner of the womens clothing and accessories boutique Girl Hour said she doesnt think small businesses are as exposed to data breaches as large retailers are, but she is still thinking about reaching out to her bank about upgrading terminals at two of her stores.
The cost implications are important and Im going to wait and see if by the end of the year there is a way to rent these terminals instead of buying them, she said. Manion already pays a $500 fee every month for the two card terminals she now has.
The Retail Merchants Association said it believes a majority of small retailers are aware of the risks from card fraud but havent started making the required investments yet. The group is developing a plan to explain the shift in liability and will start reaching out to smaller merchants soon.
Many small retailers have a tendency to wait until the very last minute until they realize they absolutely have to spend that money because for them cash is king," said Sarah Paxton Vice Chairman of the Retail Merchants Association, in Richmond VA.
(Reporting by Nandita Bose, Editing by David Greising, Peter Henderson and Sue Horton)
Technically Incorrect offers a slightly twisted take on the tech thats taken over our lives.
Thiago Olson built a nuclear reactor in high school.
Hes grown up now. So hes elevated his horizons and created a credit card.
This is no ordinary credit card. For one thing, it flashes. For another, it exists to hold all your other credit cards, as well as debit cards, store cards and that card that gives you access to that private club where youre free to wear leather, furry tassels and carry a Goyard bag with a Pekinese inside.
Launching today and shipping in April, the Stratos Card, as it is known, is frightfully revolutionary. At least thats what Olson told me as he demonstrated its flashing lights. And, yes, of course its connected to an app on your phone. Olson is 25. Weve established a long time ago that 25-year-olds create apps. Its far more difficult than creating a nuclear reactor.
Credit card companies are pelting consumers with more, and better, sign-up offers as Americans show their highest tolerance for debt in years.
In a sign of growing confidence and economic recovery, consumer credit card debt reached its highest level in nearly five years in December, and almost entirely from credit card origination, not higher balances on existing cards, according to a February report from credit reporting agency Equifax.
Overall credit card debt rose to $642 billion in December, up nearly 6% from $607 billion in December 2013, according to Equifaxs analysis of more than 210 million consumer accounts. Thats the highest its been since April 2010.
The increase in debt in the country is an indication that consumers are getting healthier, says Trey Loughran, president of Equifaxs consumer unit. Theyre more comfortable using debt.
Loughran says the increase is largely from people taking out new cards. Credit reporting agency TransUnion found a similar trend, announcing last week that the number of consumers with access to credit increased by 7 million from a year ago to hit 157 million in the fourth quarter. Meanwhile, credit card balances are up only slightly from a year ago, at an average of $1,224 per card, compared with an average of $1,210 in December 2013, according to Equifax.
Taking note of more stable consumers, competition between credit card companies has heightened; consumers have been targeted with more mail offers and better sign-up bonuses in recent months. Direct-mail credit card offers increased 12% from November to December of 2014, according to Mintel, a market research company.
Thats an unusual jump, says Lisa Hronek, a Mintel research analyst. Typically, direct-mail credit card offers are flat or decrease around the holidays because consumers stick with cards they already have for holiday shopping, she says.
Given that, I believe some issuers are thinking, well theres more visibility if our competitors are scaling back, she says. Although direct-mail credit card volume last year was in line with 2013, up about 2%, 30% more offers were sent in 2013 compared with 2012, the Mintel data show.
Increases from 2012 to 2013 and holding steady in 2014 is a continuation of issuers being comfortable in this new economy and willing to lend, Hronek says.
Consumers are also getting more out of rewards cards as card companies vie for customers. Brian Kelly, whose blog thepointsguy.com tracks travel rewards cards, says public offers so far this year are 25% more generous in the points or miles offered than during all of last year. And targeted offers for individuals are often even better.
Competition in the credit card space is at an all-time high, Kelly says. The sign-up bonus values alone can be over $1,000.
He says most airline credit cards are offering 50,000-mile sign-up bonuses right now; last year, 40,000 miles was typical. Tom Hablewitz, a 36-year-old supply chain manager for Walgreens in Vernon Hills, Ill., says he signs up for three to four travel rewards cards a year to take advantage of point and mileage offers. Hablewitz, who opened a Chase Marriott Rewards Visa in January, says he has also noticed better offers recently.
I would say that that (Marriott) card would have been a 50,000-point sign-up bonus a year or two ago and now its up to 70,000, he says. You used to get a free T-shirt for signing up for a credit card, and now youre getting almost like a thousand dollars in value if you play your cards right.