Establish Your Debt Limits
The best way to establish a solid credit rating is to handle your debt obligation prudently. First, asses how much debt, as a percentage of your income, you can afford and limit your borrowing to that amount.
When you apply for a credit, lender will evaluate your debt-to-income ratio and they prefer it to be less than 38%. For example if your monthly income is $2,000, your monthly debt payment should not exceed $760. But your own limit should be lower than that to ensure you are in safe limit. If you are young and earn a stable and growing income, you debt percentage, excluding your mortgage is preferable to keep it under 20%. If you are older and earn a less reliable income, try to limit your debt to about 10% of your income.
Try to consolidate your borrowing into a few lines of credit. You will save not only money but also bill-paying time by transferring your credit card balances to one of two credit cards with lower interest rates and annual fees. However, if you consolidate your loans, don’t assume more debt on your new-clear credit lines. If you don’t think you can resist such temptation, cancel your cards and close down the credit line.
Choosing and Paying For Your Credit
There are more than 6000 financial institutions issue credit card like Visa and MasterCard, and many department stores, appliance stores, and oil companies offer their own. Each is competing for your business. If your have worked building and maintaining your credit, you can afford to choose among them. But if you are reestablishing your credit or establishing it for the first time, you have fewer choices.
Specific things to watch out for when applying for a credit card:
1. Interest Rate
Credit card companies are making money by granting you loans in several ways. Most of their profit comes from charging interest, which can soar as high as 24 percent or higher. If you have a good credit record, you will be able to get a more attractive lower interest rate.
2. Annual Percentage Rate (APR)
The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The credit card issuers are required to state the interest rates they charge on credit cards as an APR. The APR listed on credit card application, though, does not include additional fees, monthly and daily compounding of finance charges, or the effect of a card’s grace period. In general, the more creditworthy you are, the lower your APR will be. Some lenders charge a fixed APR, while others levy a finance charge that rises and falls based on the movement of an underlying index, such as prime rate or yields on government securities.
3. Minimum Payments
The minimum that a card issuer requires you to pay each month is based on a percentage of the total balance you are carrying. The minimum percentage normally range from 2% - 3% or $10 which ever is higher.
4. Annual Fees
Many credit grantors charge an annual fee that ranges from as little as $15 for a simple card to as much as $395 for a platinum American Express card. Banks justify these fees by the services they offer, including discount travel and buying plans, 24-hour service, and other extras. To some extend, a trade-off may exist between the annual fee and the interest rate: The lower the rate, the higher the fee. Because of recent market competition, many credit card companies offer a life-no-annual-fee credit card to grab as much of credit market shares as possible.
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