From: MD Attorney General's Office of Consumer Protection
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Credit is the privilege to borrow money and obtain goods in the present based upon a promise to make repayments in the future. Credit is not a right, but merely a privilege that can be lost if it is not used responsibly. When used properly, credit is an ideal financial tool. When used foolishly, credit can cost an exorbitant amount of money in interest and fees. Misusing credit can also hurt your ability to purchase homes or cars, as well as endanger future financial stability. There are a variety of different types of credit, each carrying with it different privileges and interest rates, such as charge accounts, car loans, student loans, and home mortgages.
How Can You Control Your Credit and Avoid Debt?
You can benefit significantly from the convenience of credit. Credit cards offer such benefits as frequent-flyer miles and cash-back bonuses, and they are especially useful for large purchases, emergency situations, identification, reservations, and protection from fraud. Unfortunately, millions of consumers misuse credit cards beyond their financial means. Misusing credit can result in costly interest payments and late fees, impulse buying, overextended lifestyles, and unnecessary stress such as harassing telephone calls from collectors.
What Is Wrong With Just Paying the Minimum Payment?
Making just the minimum payment on a credit card is rarely a reasonable financial move. Minimum payments make only a very small dent into the original amount borrowed, which is called the principal. For example, if you are $5000 in debt on a credit card that carries a 17 percent interest rate. The creditor requires only a minimum monthly payment of 2 percent, or $100. Of that $100, a mere $29.17 would be applied to the principal if you made the minimum monthly payment. At that rate, it would take nearly 30 years-and cost thousands of dollars over the principal amount for you to pay off the debt. The best strategy is to pay enough toward your balance that your principal will decrease faster than your interest will grow.
Calculating the Interest on a Credit Purchase
Have you ever wondered how much you are actually spending when you choose to pay with credit instead of cash? Did you know that if it takes you 12 months to pay for a new 36” Color TV that you purchased for $1000 using a credit card charging you 18% interest, you will end up paying an extra $100 in interest charges. To learn how much interest payments can affect the overall cost of your next purchase use this online financial calculator.
What About Using the Cash Advances on Your Credit Cards?
Cash advances (getting cash through a credit card) aren’t free money - you must pay back the amount of the cash advance at a typically high interest rate, as well as pay a cash advance fee. For example, if you take a credit card cash advance of $500 you will ultimately pay back more than $600 if all payments are made on time within one year. (If any payment is late, late fees or higher interest rates may also apply.) Taking out cash advances in order to pay off existing credit card balances is not a solution to your credit woes. This method of paying bills is one of the worst financial decisions you can make, because it compounds the problem. You will ultimately end up paying off the new debt at a higher interest rate, and lose even more money.
If you ever apply for a charge account, a credit card, a car loan, a personal loan, or a mortgage , your credit history will be a major factor considered by the creditor in reviewing your request. It may even affect your ability to get a job or buy life insurance. A good credit rating is an asset and if you want a good credit rating, you must use credit with discretion. Limit borrowing to your capability to repay and live up to the terms of your contracts. Be proactive in establishing and maintaining a good credit rating.
There are three major national credit reporting bureaus collecting credit information on consumers: Equifax, Experian, and TransUnion. These agencies compile data on millions of consumers. From these files a credit bureau can produce for a subscribing creditor a revealing report about your past and present credit activity.
Banks, finance companies, merchants, credit card companies, and other creditors regularly send to credit agencies reports on their customers that contain information about the kind of credit given to you, the amount and terms, and your paying habits. Credit bureaus collect some information from other sources, such as court records.
Each time you buy on credit from a reporting retailer or take out a loan at a bank, finance company or other reporting creditor, a credit bureau is informed of your account number, the date, amount, terms, and type of credit. As you make payments, your file is updated (usually monthly) to show the outstanding balance, the number of payments, and amounts past due and the frequency of payments received 30, 60, or 90 days late. Your record may indicate the largest amount of credit you have had and the maximum limit permitted by each creditor.
Note: each inquiry about you may be recorded; any lawsuits, judgments or tax liens against you may appear as well.
If you have been denied credit, insurance, or you are just interested in learning about your credit history, you should order a copy of your personal credit report. This is not the same as your “credit score” – a number reflecting the strength of your credit history that creditors use in evaluating whether to give you credit. You must pay for your credit score, unlike your free, once-per-year credit report. Negative information can remain on a credit report for up to seven or even ten years with certain types of bankruptcies.
To obtain your free annual credit report under the Fair Credit Reporting Act, use the central toll-free number, address, or website which will direct you to all three major credit reporting companies’ websites after filling out your information one time:
If ordering online, be sure to type in the website address exactly or use the link above. There are commercial websites with similar names that may charge you a fee for your reports or cause you to mistakenly buy other products. Also, beware of pop-up ads, e-mails, or telemarketing calls that promise to obtain your free credit report for you, or to monitor your credit report for fraudulent activity. Responding to these solicitations may cost you money. Remember to double-check that you are using the federally-mandated website listed above. To request your reports , you will need to provide personal information such as your name, address, Social Security number, and date of birth.
Contacting the Three Major National Credit Bureaus
For information and questions specific to one of your three credit reports, use the contact information below for that particular bureau. Do not contact the Credit Bureaus individually to order your credit report – use the centralized information provided above to order your credit report.
P.O. Box 740241
Atlanta, GA 30374
EXPERIAN (formerly TRW)
P.O. Box 2002
Allen, TX 75013
Consumer Disclosure Center
P.O. Box 1000
Chester, PA 19022
If you have been denied credit, insurance or employment because of information supplied by a Credit Reporting Agency (CRA), the Federal Fair Credit Reporting Act requires that company you applied with to provide you with the CRA’s name, address, and telephone number. If you contact the agency for a copy of your report within 60 days of receiving a denial notice, your credit report is free. In addition, you are entitled to an additional free copy of your report per year if you can prove that:
Otherwise, a CRA may charge you up to $10 for a single copy of your report
Under the Federal Fair Credit Reporting Act, both the CRA and the organization that provided the information to the CRA, such as a bank or credit card company, have the responsibility to correct inaccurate or incomplete information in your report. To protect your rights, contact both the CRA and the information provider and follow the suggested procedure below:
This site offers legal information, not legal advice. We make every effort to ensure the accuracy of the information and to clearly explain your options. However we do not provide legal advice - the application of the law to your individual circumstances. For legal advice, you should consult an attorney. The Maryland State Law Library, a court-related agency of the Maryland Judiciary, sponsors this site. In the absence of file-specific attribution or copyright, the Maryland State Law Library may hold the copyright to parts of this website. You are free to copy the information for your own use or for other non-commercial purposes with the following language “Source: Maryland's People’s Law Library – www.peoples-law.org. © Maryland State Law Library, 2013.”