|Trinity Newsletter: March 2015
Tip of the Month: Contact a Trinity Counselor today to learn more about Trinity’s financial education programs for budgeting, credit scoring and debt management: 800.758.3844. View Trinity’s online financial education program MoneyEd to test your knowledge of personal finance.
Trinity Counselors Answer Your Credit & Debt Questions
We would like to share some of the less common questions Trinity counselors receive from clients and hope that they provide you with information that will strengthen your understanding of credit and maybe provoke a few questions along the way. And, as always, we look forward to answering any questions that you may have.
Car Rental Debt and Credit Inquiries
What do I need to know about using debit cards for car rentals? Will using a debit card lead to a credit inquiry?
While a rental car can be obtained using a debit card, it’s important to understand that a rental car company will need to run a credit report to evaluate risk. As with all financial services, rental car companies need to measure risk to adequately protect themselves against financial losses. Unlike credit cards, which require users to borrow money from credit card issuers to pay for purchases, debit cards draw funds from the user’s own checking or savings account. Debit transactions are limited to how much cash is available in those accounts, which fluctuates during a given day as funds are spent and deposits made. In addition, financial institutions may impose daily limits on the amount of transactions processed with debit cards, in contrast to credit cards, which typically don’t have daily limits, leading rental car companies to be more wary of debit cards than credit cards.
Aside from car rentals, are there other instances where using a debit card could lead to a credit inquiry?
Generally, any time a service provider is unsure of risk, a credit score is used to determine extending services. For instance, cell phone services will ask for credit card information and in cases where a debit card is used a consumer will have to deposit a larger amount of money and have a minimal score for services. In practice, however, counselors don’t see credit inquires that resulted from using debit cards for transactions.
Should I avoid using debit cards for rental car transactions?
Consumers should not be wary of using debit cards for rental car transactions. In fact, most rental car services rent cars using debit cards but rely on credit scores to extend lending terms. Using a debit card will result in a credit inquiry but the impact to a consumer’s credit score is minimal—somewhere between 3 to 5 points—and will not create long-term credit problems. Inquiries are commonly done to verify consumer information so lenders are not overly concerned with such requests. Other considerations using a debit card include limitations on services such as allowing only in-state services and restricting out-of-state travel, age restrictions to be 25 years old or older to rent, or requiring a larger deposit.
What are the advantages of using a debit card for obtaining services?
For many families affected by the recent economy, through job losses, layoffs, or health care expenses, credit capacity has declined. Increasingly, families are using debit cards for obtaining services. Families should use debit cards and secure any needed services. Using a debit card will help families regain confidence in making financial decisions and give families a sense of momentum to reach other personal finance goals.
Can Parents Manage a Student Credit Card?
Can a student’s parents manage a student credit card? Can they see charges and balances and control a student’s spending?
Under the CARD Act, students must now be 21 to obtain a credit card. But parents can allow a student to become an authorized user on their credit accounts. In the case that parents allow a student to become an authorized user, parents can manage a student’s credit card and control how the card is used. For instance, if a student does not control spending or makes purchases that are not supported by the parents, then parents can cut off access to the card. Allowing students to become an authorized user is a great way to help the student build credit. But it must be done with caution. To help parents manage a student’s credit card debt, I would suggest setting a lower balance limit for the student. With a lower limit, the student cannot exceed a spending limit and it helps parents manage expenses and monitor transactions.
Can parents limit certain types of transactions? How much control do parents have over student’s spending?
Parents can control the types of transactions made by setting spending limits and controlling usage. If they are not happy with the types of transactions, they can ask the creditor to remove the student from the account or eliminate them as an authorized user. The issue is about knowing your student and their level of responsibility. If the student does not seem to understand the costs of using credit, then don’t allow them access as an authorized user. The result could be costly to the parents—they have to pay it back, not the student.
What do parents need to know in general about how student credit cards work?
Parents should understand that the market for student cards is strong and many options are available. A student card offers different terms, higher interest rates, and lower limits than other credit cards. For instance, reviewing creditcards.com will provide a range of student credit card options. Using the website, parents can review cards fees, interest rates, terms and credit lines. But credit cards are not the only option for students. Parents can help students with a prepaid credit card. With a prepaid card, parents can add to the balance or reload the card to meet expenses, or set spending limits for students. However, using a prepaid card doesn’t help build credit—it functions like a credit card but doesn’t report to a credit bureau.
Again, parents need to know what approach—authorized user, prepaid, or credit card—works best for their student. Another option is a secured card, where the parent helps secure a line of credit with cash. Parents can put money into an account and help a student get a credit card before age 21. The option is attractive because it helps students build credit and control credit card debt. If the student defaults, the bank takes the cash—so banks are left with little or no risk in making the secured loan. Lastly, parents could co-sign for a student’s credit card. While it helps to build the student’s credit the risk falls on parents—if the student doesn’t pay, parents’ are fully liable for the debts. Above all, parents need to know their options and work towards finding a card that works best for the student.
What is the benefit of students using debit cards? What is a secured card?
Often students are not prepared to manage credit cards and graduate college with excessive credit card debts and limited credit capacity. To avoid debts and minimize long-term credit problems, Trinity counselors advise parents to use a prepaid card. The prepaid card helps build knowledge and skills and introduces student’s to personal finance—it helps student’s better learn to budget funds and make financial choices because the prepaid card has set spending limits. Or parents could use a secured credit card. With the secured card, the student builds credit history, learns to use a credit card and prepares for other lines of credit. Most importantly, we want to build skills and knowledge and prepare students for managing credit responsibly.
Credit & Debt Scams
What are a few common credit and debt scams?
Debt Assistance: Fraudulent callers seek to exploit the fact that many people face mounting credit card bills. The callers make unsolicited phone calls promising to help lower a person’s interest rates. Usually they require the consumer to pay high up-front fees of as much as $2,000 or more. Once the consumer pays the money, however, the companies fail to deliver the promised services. The end result: the consumer now is out $2,000.
ID Theft: Calls are made by criminals whose intent is to obtain personal financial information to commit identity theft. The callers may attempt to gain trust by indicating that they are associated with a bank, or that they only need to “verify your banking information” to help lower your interest rate. In other cases, they may claim to be able to negotiate better terms or conditions on a credit card account, and then pressure the citizen to disclose financial information to take advantage of their “limited time offer.”
Robo Calls: People are receiving a high volume of repeat calls from “Card Services” or similarly-named entities. People who ask the callers to take them off their calling list often run into a host of problems ranging from “spoofed” telephone numbers to third-party telephone companies that are unresponsive. Because “Card Services” callers are scam operators, they do not follow laws like the Do Not Call law, or prohibitions on recorded calls.
Spoofed Telephone Calls: Scammers making unwanted telephone calls use a new technology called “caller ID spoofing” to falsify caller ID information. This means that telephone services such as caller ID, *69 (last call return) and *57 (call trace) are no longer reliable. The use of “spoofed” numbers by fraudsters who hide from the law is spreading due to phone companies’ installation of computer equipment that allows Internet-connected computers to cheaply make phone calls to conventional telephones. Technology allows the scammer to make unidentifiable phone calls to a person’s home. When a person returns a “spoofed” call, they find that the number is disconnected, not in service, or is assigned to someone who is very obviously not the scammer. Report spoofed calls to the Federal Communications Commission.
Federal Communications Commission Consumer & Governmental Affairs Bureau Consumer Inquiries and Complaints Division 445 12th Street, SW Washington, D.C. 20554 1-888-225-5322 www.fcc.gov
How can I avoid credit card scams?
Never give your contact information to anyone over the phone. If you have questions about your credit history, pull a credit report from annualcreditreport.com or contact a credit counseling organization to have a qualified credit counselor assist you.
Do Requests for Credit Card Limit Increases Show on Your Credit Report? How does requesting a credit limit increase work?
The process is simple: call a customer service representative and ask for your credit limit to be increased or apply online for a credit increase. The question is, however, do you have the required credit score to qualify for the increase? Prior to asking for the increase, pull a credit report and review your account balances. If you have carrying high balances—or carrying more than 30% of the total credit limit—you likely will be denied.
How does a credit limit increase affect your credit report and score?
One of the key factors contributing to your credit score is the utilization rate, or the percentage of available credit you use on your credit cards (sometimes referred to as the credit-debt ratio). Utilization rate is calculated for each card individually and for all your cards in aggregate. The lower the rate, the more it boosts your credit score.
For example, if you have a credit card that has a $3,000 credit limit, ideally you should only charge up to $900, or 30 percent of the limit. That shows you have discipline when it comes to charging on your credit cards and you’re not risky because you aren’t close to maxing out your credit card.
So, your issuer is actually helping your utilization rate by increasing your limit. Suppose you are charging that same $900 balance, but your limit is only $1,500. Then, you have increased your utilization rate. If your issuer bumps the limit to $3,000, now your utilization rate has fallen and helps your credit score. This, of course, only works if you can resist the urge to spend more on your card with a bigger credit limit.
Does a credit increase show on my credit report?
When you request a credit line increase online or in an automated phone system, the review to determine eligibility will not impact your credit score. To check eligibility for an increase, creditors use information from the credit bureaus each month. This does not generate an additional inquiry.
Not sure what to do? Call to Speak with a Trinity Counselor.
With more than 20 years experience in debt management services, Trinity provides experience and expertise in personal financial services. If you would like more information about credit and debt or have questions about debt management options, contact Trinity at 800.758.3844.
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