Table Of ContentCredit
Scores,
Credit
Cards
How Consumer Finance Works:
How to Avoid Mistakes and
How to Manage Your Accounts Well
SILVER LAKE PUBLISHING
LOS ANGELES, CA ABERDEEN, WA
Credit Scores, Credit Cards
How Consumer Finance Works: How to
Avoid Mistakes and How to Manage Your
Accounts Well
First edition, 2005
Copyright © 2005 by Silver Lake Publish-
ing
Silver Lake Publishing
111 East Wishkah Street
Aberdeen, WA 98520
For a list of other publications or for more
information from Silver Lake Publishing,
please call 1.360.532.5758. Find our
Web site at www.silverlakepub.com.
All rights reserved. No part of this book
may be reproduced, stored in a retrieval
system or transcribed in any form or by
any means (electronic, mechanical, record-
ing or otherwise) without the prior writ-
ten permission of Silver Lake Publishing.
Library of Congress Catalogue Number:
Pending
The Silver Lake Editors
Credit Scores, Credit Cards
Includes index.
Pages: 288
ISBN: 1-56343-782-1
ACKNOWLEDGMENTS
The Silver Lake Editors who have contributed to
this book are Sander Alvarez, Esq., Sue Elliot-Sink,
Kristin Loberg and James Walsh.
This is the 16th title in Silver Lake Publishing’s se-
ries of books dealing with risk and economic issues
that face people living in the United States and other
developed countries.
In this book, we refer to contract terms and legal
decisions from the United States—but the spirit of
the discussion about consumer credit can apply be-
yond the jurisdiction of the courts cited.
The discussions of standard practices, contracts,
laws and court cases in this book are intended only
to illustrate underlying terms and concepts. Noth-
ing in this book should be interpreted as giving
specific legal, financial or other advice. Legal stan-
dards and best practices are constantly changing.
Check with a certified credit counselor, certified tax
adviser or attorney before taking any action based
on what you read in this book.
This book is intended to make the theories and prac-
tices of consumer lending understandable. The Sil-
ver Lake Editors welcome feedback. Please call us at
1.360.532.5758 during regular business hours,
Pacific time. Fax us at 1.360.532.5728. Or e-mail
us at
A C K N O W L E D G M E N T S
CONTENTS
CHAPTER 1
Why Credit Is So Important 7
CHAPTER 2
The Mechanics of Credit Scores 21
CHAPTER 3
How Credit Cards Work 43
CHAPTER 4
Choosing a Credit Card 59
CHAPTER 5
Using a Credit Card Wisely 85
CHAPTER 6
Dealing with Credit Bureaus 101
CHAPTER 7
Who Can Look at Your Credit 115
CHAPTER 8
Red Flags and Black Marks 127
CHAPTER 9
If You’re Having
Money Problems 153
T A B L E O F C O N T E N T S
CHAPTER 10
Family Issues 187
CHAPTER 11
Improving Your Credit Score 207
CHAPTER 12
Mortgages and Car Loans 227
CHAPTER 13
Keeping Good Credit 251
CHAPTER 14
Key Credit Terms 267
INDEX 283
C H A P T E R 1 : W H Y C R E D I T I S S O I M P O R T A N T
1
WHY CREDIT IS
SO IMPORTANT
You’ve found your dream house. The neighborhood
is perfect. The schools are great. The kitchen has
everything you want.
You’ve negotiated a good price. You’ve signed reams
of paperwork. And you open an escrow account.
Then your mortgage broker calls. Remember the
great interest rate she quoted you last week? You
don’t qualify for it. She says there are some prob-
lems with your FICO score. Your interest rate is go-
ing to be higher by almost four percentage points.
Suddenly, your monthly payments on a $200,000
loan jump from $1,150 to $1,620. That’s a 40 percent
increase!
Your eyes well up with tears as that dream house
slips away—along with the nonrefundable deposit
check you’d written. And it’s all because the mort-
gage lenders said your credit score was low.
7
CHAPTER
C R E D I T S C O R E S , C R E D I T C A R D S
Buying a house is the single biggest purchase most
consumers will ever make—and the vast majority
of people buy that house on credit. But home buy-
ing isn’t the only time your credit is important.
Your credit is a factor when you want to rent an
apartment, buy a car, get braces for your children
or take advantage of a “no interest for six months”
offer on a big-screen TV. Sometimes, your credit
history will even come into play when you apply
for insurance or for a job.
Credit history plays a vital role in your day-to-day
life, making expenses like a home mortgage more—
or less—expensive for you. And it’s practically im-
possible to rent a car without a credit card.
I T ’ S A C R E D I T E C O N O M Y
A growing number of people purchase products and
services on credit—either with credit cards or by
taking out other types of consumer loans. Ameri-
cans borrow to buy cars and trucks and put less
money down when they buy homes, as home prices
escalate in many parts of the country.
But credit cards are the fastest growing form of
consumer borrowing in the developed world. And
they have the biggest impact on most consumers’
financial status.
Credit cards are used on a regular basis by more
than 73 percent of American households, up from
16 percent in the 1970s. Most Americans have at
least one general-purpose credit card these days, and
8
C H A P T E R 1 : W H Y C R E D I T I S S O I M P O R T A N T
more often they have two or three. By general-pur-
pose, we mean a credit card not issued by a specific
store or retail chain; these cards include Visa,
MasterCard, Discover or American Express cards that
can be used almost anywhere.
In 1999, American consumers charged about $1.2
trillion on their general-purpose credit cards. By
2003, that number had grown by about a third—to
more than $1.5 trillion.
Specifically, American Express saw a 13 percent in-
crease in cardholder spending from 2003 to 2002.
And that business was increasingly profitable. Ac-
cording to the company, American Express Bank
(AEB) reported net income for 2003 of $102 mil-
lion, up 27 percent from $80 million the year prior.
Visa, the largest player in the general-purpose credit
card market, generated around $3 trillion in card
sales volume worldwide each year in the early
2000s. Even Diners Club, a relatively small player
in the market, racked up gross sales volume of $31
billion in 2001.
And then there are so-called “captive cards”—credit
cards issued by department stores, gas stations and
specialty retailers. They account for something like
half again the amount charged to the general-pur-
pose cousins.
In theory, credit cards allow you to enjoy your pur-
chases for as long as a month before you have to pay
9
