Understanding Credit

Credit Cards

What is Credit?

Credit is a contractual agreement that allows you to get a loan now and pay it back later.

There are three types of credit accounts:
Revolving agreement

Banks, gas and oil companies, and department stores typically issue credit cards based on a revolving credit agreement. You can either pay the full amount due each month or make a minimum payment - an amount less than what you owe.

Charge agreement

Charge cards - not credit cards - and charge accounts with some businesses often require repayment based on a revolving agreement. You promise to pay the balance in full each month to avoid paying interest charges.

Installment agreement

Automobiles, furniture, and major appliances are often financed via an installment agreement. You agree to pay back a fixed amount in equal payments over a certain amount of time. Personal loans are also sometimes paid back in installments.


Payments and Finance Charges

Many people get credit cards to pay for goods and services. If you pay the full amount that you owe when your credit card bill arrives, you can avoid paying extra fees and interest. However, if you only make the minimum payment, the interest or finance charges (the amount you pay for using credit) can really build up. The more money you owe on your credit card, the more the finance charges will be.


To avoid getting deep into credit card debt, do one or more of the following

  • Pay off the cards with the highest finance charges first.

  • Pay more than the minimum payment required each month, if possible.

  • Use cash or your ATM/credit/debit card to make purchases, if possible. Use a credit card only in emergencies or when necessary.

  • If you use a credit card, pay the full amount each month instead of letting finance charges accrue.

  • Replace higher rate credit cards with lower rate ones. Be sure to read and evaluate credit card offers carefully to make sure you are getting the best deal. Often, low introductory offers allow you time to pay off your credit card balances. However, make sure that a 0 percent interest rate doesn't climb to 19 percent or higher in a few months.


Choosing a Credit Card

If you are considering getting a credit card, shop around for the one that best fits your needs and won't leave you struggling financially. Check with your local bank, evaluate offers you might get in the mail, visit the websites of major credit card companies, or check out other online resources.

Look for a card that has:

  • A low interest rate

  • No annual fees

  • A grace period


Tips for Protecting Your Credit Cards

Protect your credit cards and account numbers to prevent unauthorized use by taking these steps:

  • Don't give your card number over the phone unless you have initiated the call. Make sure you're giving it to a reputable company or organization.

  • Never lend your credit card to anyone.

  • Never give your credit card number to someone for a purpose you do not understand.

  • Keep a record - in a safe place separate from your cards - of your account numbers, expiration dates, and the phone numbers of each issuer. This will enable you to report a loss quickly.

  • Limit the number of credit cards you have, and cancel any inactive accounts. Carry only the cards you think you'll use.

  • When you sign a sales slip, draw a line through any blank spaces above the Total line to keep other charges from being added.

  • Keep your receipts to check charges when your bill arrives. You have a right to question any unfamiliar charges.

  • Never leave your credit card in a purse or wallet that is unattended or in open view in a vehicle, even if the vehicle is locked.

  • Before throwing them away, shred any documents, receipts etc. that show your credit card number.

  • Shred any offers of pre-approved credit cards before throwing them away.

  • If you don't receive your credit card statement on time, notify the company immediately.


Credit Report and Credit Rating

A credit report is an overview of your financial life. It lists, in great detail, information about how much you owe, any loans that you have defaulted on, and late payments. It may also reveal whether you've been arrested or sued or have filed for bankruptcy. It is the content of a person's credit report that makes up a person's credit rating.


Also known as a credit score, a credit rating is a 3-digit number between 300 and 800 that represents your credit risk to lenders. Your credit rating affects your ability to borrow money, your ability to get health insurance and, in some cases, your ability to get a job. A bad credit rating can also increase the cost of using credit.


To help you obtain a solid credit rating

  • Make all payments on time. Late payments can damage your credit rating.

  • Open and responsibly maintain a checking or savings account. This shows you have money to pay bills and that you are setting money aside for the future.

  • Get a credit card and use it only when you can comfortably repay it. To establish good credit, you need to use credit regularly. However, don't overuse it. Lenders may become concerned that you won't be able to pay your bills.

  • Don't apply for too many credit cards. Applying for several cards can hurt your credit rating.


To find out whether you have a good or poor credit rating, get a credit report. The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies Equifax, Experian, and TransUnion to provide you with a free copy of your credit report, at your request, once every 12 months. The FCRA promotes the accuracy and privacy of information in the files of the nation's consumer reporting companies. The Federal Trade Commission (FTC), the nation's consumer protection agency, enforces the FCRA with respect to consumer reporting companies.


A credit report includes information on where you live, how you pay your bills, and whether you've been sued, arrested, or filed for bankruptcy. Nationwide consumer reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home.


How do I order my free report?

The three nationwide consumer reporting companies have set up a central website, a toll-free telephone number, and a mailing address through which you can order your free annual report. To order, visit annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. The form can printed from ftc.gov/credit. Do not contact the three nationwide consumer reporting companies individually.


You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order your report from each of the companies one at a time. The law allows you to order one free copy of your report from each of the nationwide consumer reporting companies every 12 months.


Only one website is authorized to fill orders for the free annual credit report you are entitled to under law annualcreditreport.com. Other websites that claim to offer “free credit reports,” “free credit scores,” or “free credit monitoring” are not part of the legally mandated free annual credit report program. In some cases, the “free” product comes with strings attached. For example, some sites sign you up for a supposedly “free” service that converts to one you have to pay for after a trial period. If you don't cancel during the trial period, you may be unwittingly agreeing to let the company start charging fees to your credit card.


annualcreditreport.com and the nationwide consumer reporting companies will not send you an email asking for your personal information. If you get an email, see a pop-up ad, or get a phone call from someone claiming to be from annualcreditreport.com or any of the three nationwide consumer reporting companies, do not reply or click on any link in the message. It's probably a scam. Forward any such email to the FTC at spam@uce.gov.


Under the Fair Credit Reporting Act, anyone denied credit must be provided a copy of their credit report, if they request one, for free. The credit bureau that provided the initial report to the company that denied you credit must provide you a report.


Reviewing a Credit Report

Once a year, review your credit report for errors or omissions, especially if you are considering a major purchase such as a car or home. You should also review your credit report for signs of possible credit fraud or identity theft. By closely monitoring your credit report, you may be able to stop any criminal activity in its early stages.


Correcting Your Credit Report

Under the Fair Credit Reporting Act, businesses can use the information in your report to evaluate your applications for credit. You have the right to dispute any inaccurate information. Follow these steps when disputing items in your credit report:

Clearly explain what information needs to be corrected.

Contact the credit-reporting agency (Equifax, Experian, or TransUnion) and tell them what information you believe is inaccurate or needs to be updated. Keep copies of any correspondences that you send or notes on any phone conversations.

Know what to expect.

Within 30 days, the credit-reporting agency will investigate the disputed information. If it is found to be inaccurate, the creditor involved must notify all nationwide credit-reporting agencies, so your file can be corrected.

Get the results in writing.

If your dispute results in a change to your credit report, the credit bureau will give you the written results and a free copy of your report.

If you can't get information removed, consider explaining.

You have the legal right to attach a letter of explanation to your credit file. Send this explanation to the three major credit bureaus and to any business that was involved. The business is obligated to include your letter in any future input to the credit bureaus. Businesses that guarantee to remove negative information from your credit file can't provide such a remedy. According to the Federal Trade Commission, these "credit repair" companies charge from $50 to more than $1,000 and do little or nothing to improve your credit report.