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Monday, April 19, 2010

Credit Card Act of 2009 – How to Use the New Rules to Your Advantage

Credit Card Act of 2009 – How to Use the New Rules to Your Advantage

Credit Issues by Jeff Mandel and Marlin Brandt Print Article
RISMEDIA, April 14, 2010—The activation in February of the Credit Card Act of 2009 (the “Act”) has made building credit harder for young people. To compound this challenge, everyone’s credit profile needs to be more effectively managed today than in prior years in order to:

1) Demonstrate the requisite level of credit worthiness to qualify for a new credit card, auto loan or even to rent a home

2) Minimize the interest rates they pay on their loans

Although risk-based pricing has been used by banks for a long time, its use has become significantly more prevalent in recent years. Simply defined, if a borrower represents a low risk then they will likely get lower interest rates, whereas if they represent a higher risk then they could see double-digit interest rates or no approval at all.

So what does someone who is trying to establish and build a good credit profile (history) for the first time need to do to effectively begin the process?

The new law bans credit card offers for young adults under the age of 21 unless they have an adult co-signer or provide solid proof that they have the means to repay their debts. Credit cards, such as a simple gasoline service card, have long been the basic starting point of establishing new credit. Anyone younger than 21 must get permission from parents, guardians or spouses to increase credit limits on joint accounts they hold with those adults.

The law bans offers of freebies (e.g., pizzas and T-shirts) if students sign up for credit cards on or near campus or at college-sponsored events. This was much-needed legislation when considering that 42% of college graduates were leaving school with derogatory credit. Much of this was due to their lack of knowledge on how credit works and how to manage it. The challenge has now shifted since many young adults will not really begin to build credit until they are over 21 years old.

There are still some options to help newer borrowers start building their credit profile. First, many young people own a checking account with an ATM card. Most ATM cards now double as a VISA or MasterCard secured by their checking account limit. If your bank doesn’t report your ATM card usage, ask them to start. Some banks will arrange to have charges on your ATM reported on your credit report.

Another positive change in the Act allows any consumer to add information to their credit report that supports their credit worthiness. The credit reporting agency may charge a small fee to process this type of request. If your credit history has little to demonstrate your creditworthiness, consider adding unreported repaid debts, utility payments and rent payments.

Send a certified letter to the credit bureau asking that it contact the creditor and ask that they list the payment history on your credit report. For the avoidance of doubt, it’s imperative to make sure that the payment histories associated with these types of requests demonstrate a solid history of making payments on time.

Jeff Mandel is president and Marlin Brandt is COO of ApprovalGUARD.

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