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The Credit System (Part 4)
How Pawn Shops WorkA pawnbroker makes loans on personal property left as collateral. The property can be redeemed when ..... ...... bank loan, your savings is used as collateral for any debts you may accrue using the card. The card will look like any other Visa or MasterCard, so only you and the bank know it is secured by your savings.
Shopping to Build Credit:
Once you have your card, use it. It is important now to again demonstrate a good payment record. A credit card that never gets used can actually reflect negatively on your profile!
Go to your local shopping mall and find a store that carries a returnable item in the $500 to $800 range (remember; your credit limit is $1,000). You can select a piece of jewelry, a television, audio or video equipment, or other merchandise within this price range. Make sure you understand the store's return policy - you will need to be able to return the item later for a credit on your charge account, not just store credit. Purchase the single item with your new Visa or MasterCard, take it home, and safeguard against damage or theft. After several days, go back to the store and return the item, requesting a credit on your card.
When you receive your first monthly statement for your card, you will notice a column marked Payments/Credits. Your credit for the returned item will show up in this column, although it looks the same as of you had paid for the item in full. Anyone examining your credit record will see that you made a sizeable purchase and a very early payment.
Obtain a Cash Advance:
There is one final step to establishing your good credit record with a credit card company. Stop by a different bank than the one that issued your credit card and ask for a cash advance. Visa and MasterCard allow any lending institution that honors their cards (almost all) to make cash advances for varied amounts up to your credit limit. Some allow only a 25% cash advance, while others will loan your entire amount. Be advised that borrowing money in this manner usually costs more in interest than your card charges for merchandise, so it is not a good way of routinely obtain loans. But it is useful for our credit-building purposes under this plan. Since you will be charged interest on your cash advance from the day you receive it, you may want to time this transaction toward the end of your billing cycle.
Let's assume that you get a 50% cash advance on your $1,000 limit, or $500. Don't spend the money. Put it away and wait for your next monthly statement. Use the money to promptly pay back your cash advance charge on your bill. Now you have used a large amount of your credit limit on two occasions, and your record indicates both were paid back in full. Your credit history is looking better and better!
Step Three - Un-Secured Credit Cards
Low Interest Pays Off:
Before taking specific steps to obtain an unsecured credit card, it really pays to shop around for a bank issuing Visa or MasterCard's at the lowest possible interest rate. The national average is presently at about 19 to 20 percent. At this rate, an average balance of $650 will cost you $123.50 annually in interest charges. The same $650 balance will only cost you $78 on a 12% card - a savings of $45.50 per year.
You also want to consider any annual fee charged for use of the card, which can range from $20 to $50 for premium cards such as MasterCard Gold and Visa Gold. While Gold cards traditionally require a higher annual fee, they typically offer higher credit limits. For the purposes of this plan, we do not recommend obtaining a Gold card. Take a look also at the grace period various banks allow between the time of purchase and when interest starts to accrue. If a bank offers no grace period, you will still be charged interest on your balance in full after each billing period. Again, to find out about rates, fees, and grace periods, you can pull out the Yellow Pages and call around locally. The business sections of major newspapers also often carry ads by local banks promoting the features of their credit cards.
However, you do not need to apply for an unsecured card from a local bank. Computer networking makes it easy to quickly access any bank, and most are eager to have new credit card customers, regardless of where they live. You can find a list of U.S. banks offering low interest rates for Visa and MasterCard in the Bank-lists booklet contained in this document.
How To Dispute Credit Report ErrorsFTC - April 1996 Your credit report contains information about where you work and live and how you pay your bills. It also may show whether .....
Approaching the Bank:
Once again, have the new information about your secured credit card included in your credit bureau file. Now go to a bank and apply for whichever credit card (Visa or MasterCard) you do not already have, using your bank loans and current credit card as references. When the bank refers to your credit file, they will find you have an impressive payment history and another credit card with no outstanding balance. They should be more than willing to give you a regular, unsecured bank card.
Freeing up Your $1,000:
At last, you need to have your $1,000 savings account unfrozen and the credit card released from it's secured status. Go back to the bank where you began this process, and inform the loan officer you now have an unsecured Visa or MasterCard. Explain that you received this card based upon your excellent payment history you established with their bank card. Ask now to have the hold placed on your savings released. If he/she is hesitant, suggest that you will leave your money in the savings account, But no longer want it frozen. If the officer still seems reluctant, you can politely say that you will then have to return the credit card and close your account with them. In most cases, the bank will not want to loose you as a customer and will honor your request.
However, if these efforts fail, then go ahead and return your card and close your account. Go to the bank that gave you your unsecured credit card. Tell them that you like their services and rates better than where you previously banked and want to shift your Visa or MasterCard (whichever one you do not already have there) to that bank. Your second unsecured credit card should arrive in the mail soon after!
Step Four - Department Store Credit Cards
Instant Credit:
With the first three steps completed, you should feel like a credit-building pro and be proud of your new credit profile. This next step is easy. Because you already have a Visa and MasterCard, the credit world is wide open and waiting for you to sign on.
Most major department stores offer a form of instant credit - providing you with their store credit card just because you possess a major credit card, so they can collect the interest instead of Visa or MasterCard! Best of all, department store cards are issued on an unsecured, deposit-free basis!
You usually will be asked to fill out a brief application form, show your I.D., present at least one major credit card - and you are accepted! This can sometimes be done right while you are making your purchase, or at a special customer relations desk. Many stores are even offering free gifts or special discounts to customers applying fir instant credit. Be cautious, however, to apply only for cards in stores that you normally shop at. A dormant credit card does not look good on your credit report.
While many stores of all sizes now offer their own credit cards, for our credit-building exercise it is best to obtain one from a major department store chain with locations around the country.
Department Stores Offering Instant Credit:
Below is a partial list of U.S. department stores offering instant credit. Many may have store locations in your area. All stores listed here report to the credit bureaus.
Bacons
Lazarus
Neiman Marcus
Broadway
Lord & Taylor
Nordstrom
Castner Knott
Macy's
J.C. Penny
Dillards
Marshall Fields
Sears
Halls
May Company
Maas Brothers
The Free Credit Card TrapThey arrive in your mail - a conspicuous looking mail piece from some "official looking" bank claiming that you ..... Jordan
Marsh
Mervyns
Step Five - Nurturing Your Credit
Congratulations! By now you have three bank loans, Visa, MasterCard, and perhaps several major department store credit cards. We have has planted all the seeds you need to cultivate a healthy credit profile. Now it's up to you to take care of your new credit record and allow it to grow with you as you build a more secure financial future.
Loan Scoring System
Loan Application Scoring System
Each bank has a credit scoring system that determines the acceptability of the borrower. This scoring system takes into account your income, length of employment and residence, etc.
The five major factors that all lenders give high importance to are:
1. A salary of at least $1,500 per month
2. At least 5 years at present address
3. Employed at present job for at least two years
4. A "paying on time" credit history
5. A telephone in your name
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