MONEY credit cards

How New Credit Card Limits Could Hurt Your Credit Score

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Rhonda Roth—Shutterstock

The average credit limit was down 11% from last year.

One of the best ways to improve your credit score is keep your debt levels as low as possible, and your efforts will be greatly helped by having high credit card credit limits, while keeping your balances extremely low. The higher your limit, the easier it is to do that.

The trick is you have to get an issuer to give you a high credit limit, and at the start of this year, new credit cards came with lower credit limits than they did at the same time last year, according to data from credit bureau Experian. Average credit limits on new cards were down for all consumers, even those with the best credit, but cardholders with bad credit saw the greatest decline in credit limits.

In the first quarter, banks opened $77 billion in new credit card accounts, up from $71 billion in the first quarter of 2014, but the average credit limit was down about 11% from last year. Experian broke down the average credit limits on new credit accounts by VantageScore 3.0 risk tier.

Super Prime (781-850)

Average credit limit per new account Q1 2015: $9,543
Average credit limit per new account Q1 2014: $9,604
Change: down 0.6%

Prime (661-780)

Average credit limit per new account Q1 2015: $5,209
Average credit limit per new account Q1 2014: $5,382
Change: down 3.2%

Near Prime (601-660)

Average credit limit per new account Q1 2015: $2,277
Average credit limit per new account Q1 2014: $2,497
Change: down 8.8%

Subprime (500-600)

Average credit limit per new account Q1 2015: $966
Average credit limit per new account Q1 2014: $1,171
Change: down 17.5%

Deep Subprime (300-499)

Average credit limit per new account Q1 2015: $509
Average credit limit per new account Q1 2014: $686
Change: down 25.9%

Paying your credit card balance in full each billing cycle helps keep your credit utilization rate low — it won’t perpetually creep up until it has become out-of-control debt — but having the ability to pay your bill in full isn’t necessarily the way to decide how much you should charge. From a credit score perspective, it’s more important you use as little of your available credit as possible. Many experts recommend keeping your credit card balances at less than 30% of your overall available credit, though those with the best credit scores keep their utilization to less than 10%.

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TIME Credit

Why MasterCard Should Buy American Express

World Series - Kansas City Royals v San Francisco Giants - Game Three
Rob Carr—Getty Images A fan uses MasterCard with Apple Pay to pay for garlic fries before Game Three of the 2014 World Series at AT&T Park on October 24, 2014 in San Francisco, California.

It's the smartest way to take on Visa

Last week, American Express was hit by tragedy when its President, Ed Gilligan, died unexpectedly. Sad as Gilligan’s death is, it’s only the latest setback for the charge card pioneer associated with the famous tagline ‘Don’t leave home without it’. Fierce competition from payment processing giant Visa, the loss of high profile clients like Costco, pushback from merchants, and antitrust probes have plagued the company in recent years and resulted in large layoffs.

Amex’s Q1 2015 earnings were slightly better than in 2014 and the company continues to be the second largest credit card brand in the U.S., but it accounted for only 15% of total purchase volume in 2014 compared to 56% for Visa, according to Nilson Report statistics analyzed by MarketWatch. Even MasterCard, which held 26% of the market, lagged far behind Visa. Part of Amex’s problem is a lack of debit card products, but even when comparing only credit card transactions, Visa was the sole vendor to show an increase.

For these and other reasons, this might be a good time for MasterCard to consider buying Amex.

Brand Value and Marketing Expertise

MasterCard may enjoy wide usage but Amex has held the highest rank in customer satisfaction for several years running, according to consumer survey firm J.D. Powers. The brand value of Amex’s sterling reputation and expertise in helping customers resolve fraud, merchant error, and other problems, as well as its popular rewards programs and extensive travel-related services, should not be underestimated.

There is also Amex’s closed loop model through which it manages the entire payment process from start to finish. That enables the company to collect reams of data on its customers, an extremely valuable marketing tool. MasterCard can leverage all these to improve its own offerings and differentiate them further from Visa.

Lending Capabilities

Even though Amex makes most of its money from the fees it charges merchants- its primary charge card model requires balances to be paid off in full and therefore doesn’t generate much in interest – its ability to lend is a huge advantage that could enhance MasterCard’s bargaining power with banks and other financial institutions that use its payment network.

The reason this is significant is because it would enable the company to lower the interchange fees that it needs to charge merchants in order to entice banks to lend. Such fees have come increasingly under fire by both regulators and merchants but MasterCard has been at the mercy of the banks. Having its own balance sheet through Amex, however, would give MasterCard the leverage it needs to negotiate better rates that don’t alienate merchants.

Valuable Customer Base

Amex’s customer base skews wealthier than that of MasterCard due to the appeal of its high end perks and luxury brand image, according to a study by wealth-research firm Phoenix Marketing International cited by Bloomberg. It also commands a large share of the business credit card market through its ubiquitous Corporate Card, as pointed out by investor site Motley Fool.

This is, in fact, the primary reason that Amex can charge high interchange fees. A wealthy demographic translates into higher revenues for merchants since individual transactions tend to be larger and because corporations and wealthy individuals are more likely to use plastic to pay for purchases than cash. While some merchants have objected to Amex’s higher fees, they are also hesitant to turn away the rich customer base the company delivers to them.

In the same vein, by acquiring Amex, MasterCard would gain access to this lucrative client base. It’s also possible that a combined MasterCard-Amex could offer a ‘blended’ fee structure for both types of cards that merchants find acceptable but which preserves profitability for the merged company.

Complementary Strengths and Increased Market Power

Just as MasterCard could benefit from Amex’s cachet amongst businesses and wealthy cardholders, Amex needs MasterCard’s platform to reach mainstream consumers. There was, for example, the loss of Amex’s key account with Costco, estimated by analysts to be worth about $80 billion in billed business, to a Visa card from Citigroup. And even as Amex makes overtures to smaller customers, Visa has been going aggressively after its wealthy clients with its Black Card, better incentives, and luxury concierge services. In other words, Amex is under fire on both fronts.

MasterCard also provides debit card services for banks and other financial institutions, a rapidly growing segment that accounted for 42% of all card transactions in 2014 but one that Amex doesn’t play in at all.

By merging, Amex and MasterCard could potentially take advantage of each other’s complementary product lines and expertise in serving their respective customer bases, which would enable them to take on Visa with considerably more market power.

Financially Feasible Acquisition

While MasterCard’s stock price has risen by more than 20% over the past year, Amex shares have fallen by 16%. That makes Amex a cost-effective buy. Moreover, Amex trades at a lower price-to-earnings multiple of 14x compared to 28x for MasterCard. That fact would make the acquisition of Amex highly accretive to MasterCard’s earnings in an all-stock deal since each share of Amex would bring a proportionally larger share of earnings to the latter company.

In fact, the present vulnerability of Amex due to its challenges offers an ideal opportunity for MasterCard to snap up the company at a reasonable price and start giving its arch rival Visa a serious run for its money.

Kumar is a tech and business commentator. He has evaluated mergers and acquisitions in the technology, media, and telecom sectors for leading investment banks, including PaineWebber, and provided strategic consulting to media companies and hedge funds. He has an MBA from Columbia Business School and received an award for ethics in business while in the program. Kumar does not own any shares of the companies mentioned in this article.

MONEY credit cards

6 Mistakes You’re Making When Checking Your Credit

finished puzzle with missing piece
Grant Faint—Getty Images

The biggest mistake is failing to check your credit at all.

You may know that if you apply for a credit card, loan, a place to live or perhaps a job, there will be a credit check. But do you know what someone reviewing your credit will find? You can have at least an idea of the answer if you check your own credit first. Doing so won’t affect your credit scores, so that’s not a worry. Still, there are some common mistakes consumers make when they check their credit.

You have the right to one free credit report every year from each of the three major credit reporting agencies. Some people choose to look at all three of them at once; others choose a different one to review every four months. And though federal law doesn’t yet give you a right to see your credit scores (which are derived from information in your credit reports) for free, there are plenty of free ways to do so. Some credit card issuers put your score on your statement or give you access to it online. You can also find free scores online.

So the biggest possible mistake is failing to check your credit at all. But assuming that you do, here are some missteps that could leave you with that “woulda, coulda, shoulda” feeling of regret.

1. Not keeping a credit report copy (in a safe place).

Whether you save a printout of your credit report or keep the information on your laptop (ideally in a password-protected file), if something changes, or you think something is different from what you remember, it’s nice to have past information for comparison. And if you need to dispute something, you’ll be glad you have the copy.

2. Not checking your report with all three bureaus.

Not all creditors report to all three agencies, and the agencies don’t share information. Inaccuracies can creep in, including information that should have aged off and has not, errors introduced by mistyping or same-name mix-ups. If you find an error on one, it’s smart to check the other two to make sure it gets cleared up everywhere it appeared.

3. Not getting the same score every time.

Your credit reports contain the information on which your credit scores are based. But while you have one credit report with each bureau, that data can be used to create hundreds of different credit scores. All credit scores are three-digit numbers that strongly influence whether you’ll be extended credit and on what terms, but that’s where the similarities end. Scoring models can be specific to a certain industry — credit card, mortgage or car loan, for example — and scores can vary, depending on which credit reporting agency was the source of the data. If you are trying to track changes in your credit, comparing anything other than the same scoring model from time to time isn’t very useful.

4. Not looking at the scale on which your score is measured.

Scores are not all measured on the same scale. So a score that is “excellent” on one scale may be merely “good” on another. (Yes, that even goes for FICO scores; the FICO NextGen Score, for example, has a range of 150 to 950, while most FICO score models run from 300 to 850.) So the number doesn’t mean so much without context.

5. Paying when you haven’t used your free reports already that year.

You are entitled to three free credit reports every year (and in some situations or some states, even more). There are times that it makes sense to pay for an additional one. For example, say you plan to make a big purchase and you disputed an item that was likely bringing your credit score down and you want to make sure the report is now correct — it might be worth it to pay for an extra one. However, it’s ideal to make sure you get your free reports before you pay for any further copies.

6. Getting obsessed with tiny changes.

It’s rare for a credit score to stay exactly the same from month to month. Scores fluctuate, and you want to focus on trends, not moves of a few points up or down.

The good news is if you are reviewing your credit reports on an annual basis and checking your credit scores each month, you are already avoiding the biggest mistake — not having a clear idea of where you stand. Doing so will also alert you to changes that could suggest identity theft, which would allow you to limit the damage and get it resolved quickly.

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MONEY credit cards

A Balance Transfer Can Help Your Credit Score

But there's a another way to get a bigger credit boost.

Consumers seeking relief from high-interest credit card debt sometimes turn to balance-transfer offers to capitalize on an introductory 0% deal. Refinancing can be a smart cost-saving move, but it probably won’t go very far in helping your credit score — unless you pick the right path to paying down your debt.

What it really means to transfer a balance

A balance transfer means you’re moving debt from one credit card onto a different credit card, usually to take advantage of a lower interest rate. This doesn’t pay off your overall debt, and it doesn’t reduce the interest that’s already accrued. But it does stop new finance charges from accumulating on your balance for a period of time, assuming you opt for a balance-transfer card that offers an introductory 0% or low-rate promotion.

For example, let’s say you’re carrying a balance of $10,000 on a card that charges 15% interest and your goal is to pay it off in the next 12 months. By transferring it to a card that’s offering 12 months at 0%, you’d save $831 in interest.

Just keep in mind that you’re likely to incur an upfront cost for shifting your debt onto the new card: a balance-transfer fee. This fee is often 3% (and sometimes more) of the balance you’ve transferred, reducing your savings from the balance-transfer deal. In the example above, a 3% balance transfer fee would amount to $300, bringing your net savings down to $531.

That’s still a significant savings, but not quite as generous as it first appeared.

Nerd note: At least one credit card on the market comes with a long 0% APR period and gives consumers an option to avoid balance-transfer fees. Check out our review here.

Your credit score may improve, slightly

To get an idea of how a balance transfer will affect your credit score, you’ll need to understand a few basics about your credit utilization ratio. This ratio is simply the amount of credit you’re using divided by the amount of credit you have available.

This number has a heavy influence on the 30% of your FICO credit score determined by the amounts you owe.

You’re more likely to obtain a higher credit score by keeping your credit utilization ratio below 30% at all times. This is considered by the FICO model in two ways — per-card, and across all of your cards.

Let’s illustrate this with an example, and assume that a consumer has two credit cards:

  • Card A: $2,000 balance with a $5,000 limit
  • Card B: $1,000 balance with a $3,000 limit

This consumer has a 40% credit utilization ratio on Card A, a 33% credit utilization ratio on Card B, for an overall credit utilization ratio of 37.5% (for calculations, see the methodology section below). On each of her cards and overall, this consumer’s debt is over that 30% target.

One way to bring the ratio down would be to transfer the $2,000 balance on Card A to a new card, Card C. Say Card C has a 0% promotional APR and a $5,000 limit. Her credit utilization on Card A would fall to 0%, while Card C would assume the same 40% credit utilization ratio that Card A had originally. The FICO algorithm would look at her credit report and see a card with a high balance, which means she’d still be likely to get dinged for her per-card credit utilization ratio.

But the balance transfer caused her overall credit utilization ratio to drop to 23%, because opening Card C added $5,000 of available credit to her profile. This would cause her FICO score to rise a bit. But she’ll see 3-5 points shaved off her score in the short run because of the new credit inquiry from applying for the balance transfer card.

Another option for a bigger credit boost

Using a personal loan to refinance your credit card debt may be a good choice to save on interest and give your credit score a boost. Here’s why: Only the balances on revolving credit card accounts are factored into credit utilization ratio. So paying off credit card debt with a personal loan will immediately cause your utilization ratio to plummet and your FICO score to rise.

Again, the debt isn’t disappearing. But by converting it to a different type of loan, you’re making it look different (and better) to the FICO scoring model.

The major drawback to using a personal loan over a balance transfer credit card is that interest on the loan begins accruing right off the bat — there’s no introductory 0% period to save you big bucks up front. However, you’ll still likely get a lower rate on a personal loan than what you’re paying on your credit cards, and if you get a fixed rate, it will be locked in for a period of several years.

No matter which route to credit card debt refinancing you choose, be sure to make your payments on time and pay down the balance as quickly as possible. There are few things better for your well-being and your wealth than being debt-free.

Methodology

To calculate the per-card credit utilization ratio on Card A:

$2,000/$5,000 = 0.4 (40%)

To calculate the per-card credit utilization ratio on Card B:

$1,000/$3,000 = 0.33 (33%)

To calculate the overall credit utilization ratio for Cards A and B:

$2,000+$1,000 = $3,000 (the balances on both cards combined)

$5,000+$3,000 = $8,000 (the limits on both cards combined)

$3,000/$8,000 = 0.375 (37.5%)

To calculate the overall credit utilization ratio for Cards A, B, and C:

$2,000+$1,000= $3,000 (the balances on all cards combined)

$5,000+$5,000+$3,000=$13,000 (the limits on all cards combined)

$3,000/$13,000= 0.23 (23%)

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MONEY Scams

10 Phone Scams You Should Hang Up on Immediately

hand hanging up phone
Shutterstock

Credit card rate reduction scams are the most common.

It might sound like an unexpected blessing — a call from out of the blue, promising to help reduce the interest rate you pay on your credit cards.

In reality, if you take the shysters up on their offer, you could end up losing thousands of dollars in fees or becoming the victim of identity theft.

These credit card rate reduction scams were the most common telephone scam during the first nine months of 2014, a study by Pindrop Security found. Pindrop helps companies prevent phone-based fraud.

Todd Mark, director of fundraising for Navicore Solutions, one of the nation’s largest nonprofit credit counseling firms, isn’t surprised by the prevalence of the scam. “People feel a bit more confident in the economy or in a better position to try to protect what they have.” So when a call comes in offering to help cut their credit card interest rates, “people hear what they want to hear,” Mark says. They think, ” ‘Wow, this just fell into my lap!'”

Pindrop analyzed more than 26,000 comments from online forums and complaint sites, and nearly 20 percent were about credit card rate reduction scams.

The callers promise interest rate reductions, but first the victim needs to pay the caller an upfront fee, Pindrop found. The victims rarely received a rate reduction, and might be asked to disclose personal and financial information, which then can be used to commit identity theft.

According to the Federal Trade Commission, these callers claim they’ll save you thousands of dollars in interest and finance charges, and you’ll pay off your credit card three to five times faster. Those promises seldom materialize, and victims rarely get their money refunded.

You should never give out your credit card information to callers, the FTC warns. Scammers can use it to make charges to your credit card or sell the information to other bad guys.

Even if a caller offers legitimate services, you don’t need to have a third party involved if you want to try to get your credit card interest rate reduced, Mark says. Instead, you can work directly with your creditors or nonprofit consumer credit counseling agencies. Consumer credit counselors will help you for free, looking at your debt, the interest rate you pay and your credit score. They can advise you on how to ask your credit card company for a lower rate, or you can enter into a debt repayment plan for a minimal monthly fee in which the agency will negotiate your interest rates for you and handle bill repayment.

If your credit card company won’t budge, you can shop for a new credit card or apply for a bill consolidation loan from your bank or credit union, Mark says.

The credit card rate reduction scam is just the tip of the iceberg, with consumers plagued by scammers doing everything from offering free cruises to threatening arrest because of nonpayment of debt.

In fact, the telephone is the most popular means of communication for shysters, according to Fraud.org. Of the more than 10,000 consumer complaints filed to the site in 2014, more than 40 percent of the scams originated with a phone call, while about 30 percent originated electronically via email.

Of the complaints examined by Pindrop Security, about 60 percent of the phone scams involved the caller impersonating a representative from a government agency or financial institution.

Many of the fraudsters have enough of your personal information, such as part of your Social Security number, your address or your bank account details, to sound legitimate.

The remaining nine top scams identified by Pindrop are:

No. 2. Home security systems: The caller offers a free home security system, and may mention a rash of burglaries in the neighborhood to frighten the victim into action. But the system is far from free. It comes with expensive long-term monitoring costs or fees.

No. 3. Spam text messages: Victims receive a text saying to call a certain number or check a particular website to win a prize. The message is designed to get you to reveal personal information, or to put malware on your computer.

No. 4. Free cruises: This scam involves calls or texts offering victims a free cruise. They’re pressured into disclosing credit card information to pay for taxes and fees.

No. 5. Government grants: Victims are told they’re receiving a government grant of between $5,000 and $25,000 just for being good citizens. They’re charged hundreds of dollars in “processing fees” and may be asked for their bank account information.

No. 6. Microsoft tech support: The caller claims to be from Microsoft tech support and says your computer is infected with a virus. He’ll request remote access to your computer to fix the problem and then may install malware to steal your personal information. You may be charge for this “service.”

No. 7. Auto insurance: The caller says you’re eligible for a lower auto insurance rate and asks for your personal information, which is used for identity theft.

No. 8. Payday loans: The caller targets those who have applied for a payday loan, claiming to be a debt collector. He’ll demand payment and late fees. You’ll be told to send payment, and you’ll be threatened with arrest if you don’t pay up.

No. 9. IRS scam: This is a quickly growing problem. Someone claiming to be from the IRS says you owe taxes and penalties. If you don’t pay by prepaid card, wire transfer or credit card, you’re threatened with arrest or legal action. Your personal information also may be targeted.

No. 10. Bank scams: The caller claims to be from your bank and says there’s a lock on your account or a hold has been placed on your debit card. You’re asked to verify your financial information, which the bad guys then use.

If you get a call from someone claiming to be from your bank, saying you need to verify your financial information or offering to help reduce your credit card interest rates, red flags should go up, says Chantel Negron, loss prevention manager at Grow Financial Federal Credit Union in Tampa.

Your financial institution may call, but won’t ask for your bank account number, PIN or card expiration date because the information is already on file, she says. It also won’t ask you to “pay fees upfront and work out a loan on the backside.”

Don’t fall for Friday scam
Scammers also may make an urgent call on a Friday afternoon, saying your debit card is about to be deactivated and asking for your financial information. “People react to that,” Negron says.

If you receive such a call, hang up the phone, then look up your bank’s phone number yourself and call directly. Never use a number the caller provides.

Matt Anthony, vice president of marketing at Pindrop Security, said the company’s research found “the same bad actors for multiple scams,” with several scams run from the same call center.

Some scams, such as the Microsoft tech support scam, have persisted for years. That means they’re effective, Anthony says. “The bad guys do what works.”

The fraudsters may doctor their phone numbers so it appears as if the call is coming from Microsoft or the IRS.

If you receive a robocall, hang up. Don’t press a number to speak to a live person or to get your name removed from their call list. It will just lead to more robocalls.

If you think you’ve been hit by a credit card interest rate reduction scam or other fraud, you should file a complaint with the FTC, or call 877-FTC-HELP877-FTC-HELP FREE.

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MONEY Debt

6 Debt Consolidation Traps to Avoid

rolled up dollar in a mousetrap
Sabine Scheckel—Getty Images

Beware 'frugal fatigue'.

When you’re drowning in due dates, debt consolidation can sound like a godsend. Your credit cards, line of credit and other loans get consolidated into a lump sum you can tackle at a lower interest rate and with a minimum payment that’s manageable. But if you aren’t savvy when combining your debts, you could be worse off.

According to a 2014 Gallup survey, the average American credit card holder has 3.7 credit cards; TransUnion 2015 research found the average borrower carries $5,142 of credit card debt. Tack a line of credit, car loan or student debt onto your string of credit card bills, and you can see why debt consolidation looks like a viable resolution.

“Somebody who considers [consolidation] is in over their head, reaching their limits on their credit cards and they’re experiencing financial hardship,” Kathryn Bossler, a financial counselor at Green Path Debt Solutions, says. “But consolidation is just a temporary bandage for a bigger problem.”

“It’s a tool and it’s not step one because nothing has changed,” agrees Carol Lewis, a certified financial planner who specializes in helping consumers get out of debt. “By itself, debt consolidation won’t do anything for you.”

Tread carefully, the experts say, or you could end up in more financial trouble. Here are six common debt consolidation mistakes consumers make and how to steer clear of them.

Trap 1: You don’t acknowledge the root of the problem
People often turn to debt consolidation because their spending gets out of hand and they can’t manage the repercussions, Bossler says. It’s typically a knee-jerk reaction as the debtor grasps at straws, but it doesn’t address how their lifestyle sunk them into debt.

“When I counsel someone, I encourage them to really understand the root issue of what got them there in the first place,” Bossler says.

Consolidation occurs with debts that are greater than $10,000, Bossler estimates. Those debts didn’t happen overnight, and a resolution shouldn’t either. If you don’t come to terms with what got you into debt, it could happen again.

Both Bossler and Lewis have seen it firsthand: Clients promise they won’t rack up insurmountable debt again, but within a few years they’ve returned to their old ways. “If you haven’t changed any habits, you can guarantee you’ll be right back in debt in a matter of months,” Lewis says. “This is about changing behavior and making sacrifices.”

Solution: Don’t gloss over your previous actions. Face them head on and get professional help in retracing your steps.

A credit counselor, money coach or financial adviser can comb over your spending and help you identify trends. Perhaps you were pouring too much of your income into basic expenses such as housing, car payments and living costs, and you need to evaluate ways to downgrade. In other cases, the problem could be as simple as reducing overspending on entertainment.

Replace your old habits with new ones. Track your spending on a regular basis and evaluate the differences between your needs and wants.

Lewis doesn’t advise consolidation often. She says she prefers to work with clients for months to gauge how serious they are about repaying their debt. If they show that they won’t go back to spending, they’re a better candidate for debt consolidation.

Trap 2: You don’t research your options before consolidating
There are multiple ways to consolidate your debt. You may commit to a secured or unsecured loan, transfer outstanding debt onto a new or existing line of credit, or pool your debt on a balance transfer credit card.

Debt settlement and debt management plans are other options. Debt settlement is the practice of paying a lump sum to settle a debt for less than what you owe. For-profit debt settlement companies negotiate with creditors on your behalf and charge you a fee, often a percentage of the amount of debt that is forgiven.

A debt management plan is an agreement between you, your creditors and a nonprofit credit counseling organization. Your credit counselor works with creditors to consolidate the full amount of your loans at a lower interest rate or for a longer repayment period (three to five years usually). You make your payments to the agency and usually pay a small fee (max $50 a month).

Thomas Nitzsche, a financial educator at the nonprofit counseling agency Clearpoint Credit Counseling Solutions, estimates that the average credit counseling client cuts their interest rates in half and reduces their total monthly payment amount by 20 percent.

Each option comes with its own benefits and drawbacks, and they will differ depending on your circumstances. You can run into trouble if you don’t understand the terms of a deal before agreeing to it.

Some consolidation plans come with hefty upfront costs from origination fees or transfer fees. A credit card balance transfer, for example, will likely cost 3-5 percent of the amount of money transferred onto the new card. It may also offer a low interest rate for a promotional period but then the rate spikes. Forgetting that deadline could cost you dearly.

“A lot of people treat the minimum payment as an installment payment,” warns Nitsche. But “it won’t get you out of debt, especially if you keep using the line of credit or credit card.”

Solution: Be proactive in your search for the best consolidation plan. Lay out all of your outstanding debts, shop around for interest rates and even pick up the phone and call your creditors to see if you can negotiate a lower rate. You may find options that are better than consolidation after crunching some numbers.

Creditors may be especially willing to work with you if your debt is due to a job loss, health emergency or other extenuating circumstances. “Consumers hold more power than they realize,” Lewis says.

If you do decide to consolidate debts into a new loan, make sure you understand its implications. Check to see if there are fees, rates that may creep up or if you’re leveraging assets you aren’t comfortable putting on the line to secure a lower interest rate.

“You need to be strategic because you might be doing more damage than good and experience financial loss,” Nitzsche says.

Trap 3: You consolidate the wrong debts
In some cases, consumers consolidate all of their debts, even the ones that have low interest rates, such as student loans (for federal student loans you can only do this if you’re already in default; private lenders’ policies vary). If you aren’t careful, you might even roll in low interest credit cards so you’re paying higher interest in the end for the convenience of a single, consolidated payment.

It’s not worth it, the experts say. “There is a psychological effect of combining all the debt because it seems more manageable, but if you don’t pay attention to interest rates, it might not make sense,” Nitzsche says.

Solution: You’re better off consolidating high interest debts and leaving out the low interest, low balance debts to pay off separately.

A 4 percent interest rate on a student loan transferred onto credit card with a temporary 0-percent rate may sound reasonable, but you need to factor in the balance transfer fee, then remind yourself of the double-digit interest rate to follow if you don’t pay off the debt within the promotional period.

Trap 4: You choose the wrong professional
The debt settlement industry is notorious for aggressive tactics and shady practices. Firms will often withhold payments from creditors for months to force a deal. This is sometimes effective, but does serious damage to your credit score.

Until a few years ago, another common practice among debt settlement firms was to charge clients fees before obtaining results. The Federal Trade Commission barred such fees for any firms that contact you by phone but fees can still be hefty.

Even among nonprofit credit counseling agencies, some are a better fit than others. Not all agencies work with all creditors, for instance. Some have dismal success rates with their debt management plans or counselors with whom you just won’t click.

Solution: Check with the Better Business Bureau about any organization you’re considering, look at the company’s website and read through reviews. If the organization is bombarding you with junk mail or aggressive sales tactics, avoid it.

Be especially wary of debt settlement firms. “I’ve never known [these companies] to be a good proposition for anyone,” Lewis says, suggesting that high fees and empty promises may be on the other end of a too-good-to-be-true deal.

Nonprofit credit counseling agencies are usually a better bet. Look for one that belongs to either the National Foundation for Credit Counseling or the Financial Counseling Association of America (formerly the Association of Independent Consumer Credit Counseling Agencies). Agencies accredited by these organizations must maintain standards and their counselors have to complete a certification program.

Then ask questions of the credit counselor about fees and success rates, and get a feel for the counselor you would be working with. If it doesn’t feel right, find someone else.

Trap 5: You use your cards too soon
Consolidation can feel like an incredible relief from angry collections calls and the task of juggling a dozen credit card bills with mounting interest. But there’s a danger of feeling invincible.

“The mistake is to say everything’s OK again and all of my credit cards have zero balances now,” Bossler says.

A common error is using the newly freed up credit on your once maxed-out credit cards to spend again. Many people promise they’ll only charge the card once, but before they know it, they’re back in the same spot they were in before.

Solution: Remind yourself that you don’t have a clean slate — you still have a considerable amount of outstanding debt.

Close most of your credit cards or, at the very least, cut them up, put them in a vault or freeze them in a block of ice. Hang on to one or two credit cards with low credit limits — they should only be used for emergencies.

“You need to cut them up because if you don’t, the temptation will be there to use them again,” Bossler warns.

Leaving many cards open also leaves you vulnerable to identity theft.

Trap 6: You don’t have a plan moving forward
You’ve sought the help of a professional, picked the best consolidation plan for your needs and bid good riddance to your credit cards. But you aren’t off the hook yet.

You need a solid plan for paying off your consolidated debt. That way, if life throws you off course, you won’t turn back to plastic.

“When you need new tires of your washing machine goes, your instinct will be to charge these expenses. That’s a sign you could get yourself in trouble again,” Bossler says.

Without an action plan, you’re blindly paying off your consolidated debt. Frugal fatigue could set in and you might turn to shopping sprees to relieve it if you don’t have effective coping strategies in place.

Solution: Sit down with your family, and with the help of a credit counselor or financial planner, create a budget that balances your income with your spending and savings goals.

“A budget is such a simple, basic concept, but it’s so powerful. It’s the way you learn to live within your means,” Bossler says.

Lewis teaches her clients to live off predetermined amounts of cash set aside in envelopes — a separate stash for groceries, entertainment and transportation, for example.

Your budget should also include putting money into an emergency fund for job losses, a leaky roof and other unexpected costs. You’ll ideally save for seasonal expenses such as Christmas presents, weddings and holidays, too.

“You’re putting that money aside so it eliminates the need for credit moving forward,” Lewis says.

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MONEY credit cards

What to Do When You’re Denied Credit

hand with denied stamp on it
Malte Mueller—Getty Images

You can dispute any errors.

If you’ve been denied credit recently, an adverse action notice may be coming your way.

Don’t let the name scare you. The notice is designed to give you the information you need to improve your credit for the next time you apply.

What is an adverse action notice?

Lenders are required to send you an adverse action notice if they deny you credit based on information found in your credit report. The notice typically includes the following information:

  • The specific reasons why your application was denied, or the contact information of the person who can provide that information to you.
  • The credit bureau’s noninvolvement in the decision and inability to provide you information as to why your application was denied.
  • Your right to request a free copy of your credit report within 60 days of receiving the notice.
  • Your right to dispute the accuracy of any information found in your credit report.
  • How to request your credit report, including the name, address and telephone number for each of the three major credit reporting bureaus — Experian, Equifax and TransUnion.
  • Your credit score, if your score was a factor in the lender’s denial.

According to regulation, the adverse action notice may be in the form of a letter, an electronic statement or a phone call. Though lenders aren’t required to send the notice within a specific timeframe, they must do so in a reasonable amount of time.

What to do if you get one

If you receive an adverse action notice, don’t ignore it. Rather, use it to be proactive about repairing your credit:

Note the reasons why you were denied.

It may say something like “delinquent past or present credit obligations with others” or “limited credit experience.” Whatever the reason, create a plan to improve or establish whatever credit behavior that remedies the situation.

Order a copy of your credit report.

Use the credit bureau contact information provided to request a free copy of your credit report. Once you receive it, review it to make sure there is no inaccurate or incomplete data that may have caused you to be denied. If you do find anything that’s off, contact the credit bureau to dispute the error.

Note that you don’t have to wait until you’re denied credit to view your credit report. You can order a free copy from each of the three major credit bureaus once a year through AnnualCreditReport.com

Work to improve your overall credit.

Though it’s important to focus on the specific reasons why you were denied in the first place, it’s helpful to establish other good habits that can boost your overall credit over time. Plan to pay your bills on time, keep your credit card balances low and apply for credit only when you need it.

Consider a secured credit card.

Designed specifically for people with bad or no credit history, a secured credit card can help you build or repair your credit. A secured credit card issuer requires a collateral deposit that’s usually equal to the amount of your line of credit. You can then use the card and make payments like you would with a conventional credit card to demonstrate a reliable payment history.

When you apply again

After you’ve taken steps to improve your credit history over time, you may be in a position to apply again. Before you do, consider the loan or credit card carefully. Ask yourself if you really need it. If you do, be sure to continue practicing the good credit behaviors you’ve developed to maintain the progress you’ve made.

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MONEY

Check Out the Summer’s Best Credit Card Deal

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Mike Kemp—Getty Images

A good card just got a bit better for a limited time.

If you’ve ever considered applying for a Discover credit card, now’s the time to pull the trigger.

All new customers who signup for a cash-back Discover card in June and July, which includes the it and it Chrome cards, will automatically have their rewards doubled at the end of 12 months. (The Discover it is a MONEY Best Credit Card.) The announcement comes on the heels of the February release of the Discover it Miles card, which doubles the rewards for all customers at the end of a year.

This can be a profitable proposition for new cardholders. Take Discover it, which offers 5% cash back on categories that rotate every three months. From July to September, the first period new cardholders can participate in, customers receive 5% cash back on all purchases at Amazon.com, home improvement centers, and department stores, up to $1,500. The juiced-up categories for winter will revolve around holiday shopping, and the beginning of 2016 may once again reward gas purchases, as in 2015. Normally if you spent the maximum over the course of a year, you’d earn $300; now it’s $600. A 10% return on shopping you would have done anyway is especially valuable in this low interest rate environment.

Cardholders also earn 1% back on unlimited purchases that don’t fall into the 5% categories and receive a $50 cash back bonus when you refer a friend. That’s doubled too, as is the card’s shopping portal, Discover Deals, where you can earn revved-up rewards at hundreds of retailers. Right now Discover customers can receive up to 10% off of their Hertz rental, for example.

And there’s no annual fee, so you won’t be punished once the extra rewards period runs out.

MONEY credit cards

When Someone You Love Opens a Credit Card in Your Name

woman glaring at boyfriend
Klaus Tiedge—Getty Images

Coping with financial betrayal.

When a loved one uses your personal information to apply for credit, he or she has committed identity theft. After the initial shock of discovering this betrayal, you face difficult decisions. One is that if you report the person to law enforcement, you run the risk of damaging your relationship. But if you don’t, you may not be able to get out from under any debt created and it could take years for your credit to recover from any damage done.

To help with the decision process if this happens to you, the Nerds reached out to Bruce McClary, vice president of public relations and external affairs at the National Foundation for Credit Counseling.

Gather the facts

The first item of business, regardless of which direction you take, is to collect all the information that confirms what happened and points to a possible perpetrator. Start by ordering a free copy of your credit report from AnnualCreditReport.com to find the fraudulent account and see whether there are others.

Next, call the credit card issuer to tell it that you did not open the account. Ask the issuer to close the account and flag it as fraud. Request a copy of the signed cardholder agreements and any records of interactions the company has had with the person in question. If you choose to report the fraudulent activity to the authorities, McClary says it’s important to “confirm what took place and leave no room for doubt in the eyes of the law.”

Freeze your credit

Contact all three credit reporting bureaus and add a fraud alert to your credit report.

A fraud alert typically lasts 90 days initially, but you can renew it indefinitely. If you file a police report later, you can choose to request an extended fraud alert, which stays on your credit report for seven years. Once you have a fraud alert in place, creditors must call a phone number you provide to confirm your identity before extending any credit.

Nerd note: Because your loved one may know enough about you to pass a credit grantor’s identity quiz, the Nerds recommend using your cellphone or work number to ensure that the creditor reaches you.

Deal with your emotions

Deciding to confront your loved one about the identity theft may be the most difficult step in the process. You’ve been deceived by someone you trusted, so it’s a good idea to take some time to work through the shock. It’s also understandable that you might have second thoughts about filing a police report against the person. You’ll likely want to consider how outing him or her could affect your relationship as well as the individual’s relationship with others close to you.

When working through this dilemma, McClary urges you to “consider the fact that they acted without any regard for your rights or feelings when they committed the crime.” Although this doesn’t make it easier, it’s a reminder you are the victim and any consequences will remain on your credit report for up to seven years and might cost you when you apply for credit.

Seek a resolution

If you caught the fraudulent activity early enough and not much damage has been done to your credit, you may be able to resolve it personally with the loved one. Andy B., a 28-year-old insurance adjuster from Lincoln, Nebraska, was fortunate enough to deal with his case of familial identity theft this way.

While applying for a personal loan, Andy’s loan officer told him he had a high balance on a card that he knew nothing about. After some digging, he found out that his mother had opened up a credit card in his name 10 years previously. “I called her after I got off of the phone with the credit card company,” Andy says. “It was confusing, to say the least. I have a very positive relationship with my mother. … I knew she didn’t act maliciously and I definitely didn’t want to get her into any sort of legal trouble.”

After working things out with his mother and the credit card company, Andy is no longer liable for the debt and doesn’t think his mother will be prosecuted. He adds, “Do I think it was irresponsible? Yes. Do I forgive her? Absolutely.”

Andy acknowledges that he and his mother are fortunate to have worked this out, but he “can think of countless ways a family member can destroy a family member’s credit, not to mention their trust.”

Another alternative is to file a police report. Although this may not sound appealing because of how it could affect your relationship with the perpetrator as well as those around you, McClary believes that it’s necessary if you want to save your credit: “Notifying the police creates a record of enforcement that can be used to clear your name from the debt when that information is shared with the creditors.”

Put it in perspective

Regardless of which avenue you choose after your identity is stolen by someone close to you, your relationship may still suffer. The question you need to ask yourself is if you want to suffer the consequences of damaged credit, which could potentially make it difficult for you to obtain credit at favorable rates — if at all — for years to come. The decision is a personal one, but it’s important that you do what’s best for you and your financial future.

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