So, I recently got a letter in the mail regarding my Citi Dividend Platinum Select Card. Supposedly, I’m such a valuable cardmember that I’m being “upgraded” to the Citi Dividend World Mastercard.

Among some new perks such as price protection, concierge service, and PayPass, the most worrisome addition is that the card has no pre-set spending limit.

What is “no pre-set spending limit”?
According to Citi, it means:

You can make purchases beyond your revolving credit limit, as long as the amount exceeding your revolving credit limit is paid in full each month. The ability to make purchases beyond your existing revolving credit limit is based on cardmember account performance, payment history, credit record and ability to pay the maximum account balance.

So, there is a credit limit but I’m allowed to go over it if my credibility is good. It sounds great but the negative side to this slight convenience is how this line of credit is reported to credit bureaus.

The Negative Effect on My Credit Score
The buzz from the personal finance community is that “no pre-set spending limit” cards can prove to be detrimental to credit scores. While credit card issuers may be more lenient to my spending, they do not actually report the card’s credit limit like the typical credit card.

Instead, Citi will report my highest balance as my credit limit. If I have no balance, that means this credit card account is considered to have a credit limit of $0. So, my current credit limit of $10,000 will no longer exist to the three credit bureaus.

This comes as a drastic change to the way my debt utilization ratio is calculated and that ratio represents a substantial part of every person’s credit score calculations.

• With a $10,000 limit, a $100 balance results in a debt utilization ratio of 10% – cheers to a great credit score.
• With no pre-set spending limit, my $100 balance would mean a $100 reported limit that results in 100% debt utilization – credit score goes to hell.

Staying Out of Harm’s Way
While I do have another credit card for use, my Citi card was my first line of revolving credit with a substantial limit and I’d like to keep it that way. The best way to not let this affect my credit is to opt out of this upgrade (hope I don’t have to close my credit card if I can’t).

(Photo credit: xJasonRogersx)

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So the Credit CARD Act of 2009 has put a lid on credit card access for anyone under 21 years old. Luckily, there is a tiny crack in the seal that can still help build good credit history for young adults.

According to the new rules, you can get a credit card under 21 only if you:

1. have an adult (of 21 years of age) to co-sign the credit card agreement.
2. or, can demonstrate the ability to repay the balance.

Now, it may seem like the end of the world when a parent refuses to co-sign for a credit card while it seems impossible to find a job that would prove you can sustain credit card debt.

Obviously, they know that the credit card is an evil they don’t want to be left responsible for. But, that doesn’t mean there aren’t options that they’d be willing to co-sign.

• Student Loans
  The cost of a college education is only going to go up and it is highly unlikely an 18-year-old has the money to pay for all of it on their own without help from parents, scholarships, and… student loans.

  While a student loan would probably still require a co-signer, parents are more comfortable with co-signing because it is used to pay for an education as opposed to discretionary spending. On top of that, the interest rates are lower than credit cards and most student loans (such as Federal Stafford Loans) do not need to be repaid until after graduation.

  If you can afford the college education without taking student loans, but would still like to begin building credit at an early age, consider applying for a small federal student loan in the first semester of school, if possible.

• Secured Credit Cards
  Secured credit cards are the optimal tools for cautious consumers and those rebuilding their credit after financial disasters such as bankruptcy.

  While the rules of the new credit card laws do not state any exceptions for secured credit cards, I’m assuming that they still apply. With money in a collateral account that ensures you’d have money to repay the debt, parents are much more likely to co-sign one for you. Or, credit card issuers may be more lenient as to who gets a card.

• Monthly Services
  Firstly, this is a long shot. A few companies that offer monthly services such as cell phones, cable, or internet services may post monthly payment amounts on your credit report. To find out if they do, simply give them a call and ask or check your credit reports at www.annualcreditreport.com.

  Selecting a cell phone company based on whether they report monthly payments to the credit bureaus is not a good idea, nor is signing a cellphone contract just to build credit.

You Don’t HAVE to Build Credit Yet
The new credit card legislation was written to stop young adults from falling prey to consumer debt. If you can’t find a way to build credit, don’t sulk and whine because having a super high credit score is not that big of a deal. Our government is telling us to stop digging ourselves a hole that we spend the rest of our lives trying to climb out of.

Many people have lived with little to no credit. They may have safer loans such as mortgages or car loans but they rarely rely on a credit card – a feat that is quite liberating. Some of you may find that you don’t really need credit as you live some your liveliest years without it.

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For the many young adults, especially college students, how to use a credit card may be common knowledge but how credit works is quite the mystery. That doesn’t come as a shock since most teens start receiving credit card offers as soon as they become 18 (although that is no longer the case).

On the other hand, there are some young adults who are more cautious when it comes to consumer debt and avoid credit cards until they find out later that credit cards play a significant role in building good credit history and a good score.

Reader and 22-year-old college graduate Cora asked:

“I don’t have credit card yet, but I do have a debit card. Do I still have a credit score (especially when I charge credit instead of debit for certain purchases)?”

Almost Everyone Has a Credit Report
Firstly, if you have a Social Security number, you have a credit report. The moment a Social Security number is issued in your name, you have your own credit report – and you could be just a few weeks old. It’s not surprising when we hear crooks committing identity fraud on children and those children grow up many years later to discover they have a tarnished credit history.

• If you have no credit history, you have nothing on your credit report. A blank credit report offers no information to input into a credit score calculation – therefore, you have no credit score. You cannot be classified as having poor, fair, good, or excellent credit.

With no credit history, lenders have no way to gauge your likelihood to repay your debts and they are reluctant to extend a line of credit to you. Like most young adults including myself, your first opportunity to establish credit would probably be with a student loan co-signed by a parent.

Thanks to the Credit CARD Act of 2009, building good credit is now more of a hassle since credit cards can no longer be issued to those under 21 years of age unless they have a cosigner or proof of ability to repay.

If you have no credit history and find it difficult to obtain a regular credit card (and you’d like to remain financially independent), sign up for a secured credit card. A secured credit card uses money you deposit in an account as collateral – the amount you deposit is your credit limit.

It would be wise to visit www.annualcreditreport.com to retrieve a free credit report. In fact you might as well perform a financial checkup while you’re at it.

Credit-less “Credit” Debit Card Purchases
As for those “credit” purchases made with your debit card, there is no direct relationship to your personal credit report. Since the debit card is linked to your checking account, which is not considered a line of credit, nothing is recorded on your report.

Banks ask you to select the “credit” option because when you do so, they can charge the merchant (where you swiped your debit card) a credit processing fee which is around 2-3% of the purchase amount as opposed to the ten cents it costs them to conduct a “debit” transaction.

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Like the majority of other money-conscious folks out there, I was also one to believe the long preached advice to not cancel your old credit card accounts because the credit history of that account would disappear from our credit report.

We don’t want to see our squeaky clean credit repayment habits wiped off our reports so we follow the widespread convention of cutting up the old plastic or putting them in the back of the freezer.

Luckily, Craig Watts, a spokesman for FICO, has come out to debunk the financial myth.

Positive credit history remains on your credit report for 10 years while negative credit history sticks with you for 7 years. Information from closed credit card accounts still plays a factor in calculating the “payment history” portion (35%) of your credit score. Another 15% of the credit score consists of the length of your credit history, which will still account for the age of the closed accounts.

While this may come as a relief to those who have been on the fence about officially closing their old credit card accounts, canceling your old, unused credit cards doesn’t mean that it will have absolutely no effect on your precious credit score. Depending on your financial situation, how much your credit scores suffers will vary.

Your Credit Score Can Still Take a Hit
Disproving this once-universal belief of closing old credit cards doesn’t not solve the headaches and worries of those who still carry major credit card debt. The FICO credit score takes the debt-utilization ratio into account – comprising a whopping 30% of your credit score. Also, known as the credit-to-limit ratio, the debt-utilization ratio is calculated by dividing your total outstanding debt by your total available credit.

Closing an old credit card account will mean that you are decreasing your total available credit – and if you’ve had it for a long time, you may have a large credit line. If you are carrying a ton of debt and you cancel a credit card, it will make a significant dent to your credit score because the debt-utilization ratio went up.

• If you have a balance of $2,000 on credit card A with a credit line of $5,000 and no balance on credit card B with a credit line of $5,000, your debt-utilization ratio is 20%. Closing credit card B would change your debt-utilization ratio to 40% and therefore, would hurt your credit score.
• If you have no balance on credit card A with a credit line of $5,000 and no balance on credit card B with a credit line of $5,000, your debt-utilization ratio is 0%. Closing either one of the cards would still result in a debt-utilization ratio of 0%.

To Minimize the Damage
So, the announcement would be of great news to those who are already debt-free and are looking to rid themselves of the potential to become repeat victims of credit card debt. Since the largest impact of closing a credit card account seems to be on the credit-to-limit ratio, it would be best to close the account when you have zero debt (yes, quite an impossible feat for many). With no debt, your debt-utilization ratio would be 0% whether your total available credit is $100,000 or $100.

Even if you have a small amount of credit card debt, closing a card of two shouldn’t do much harm – especially if it acts as a psychological stepping stone towards your goal of becoming debt-free.

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The provisions of the Credit CARD Act of 2009 targeting youth and credit will be going into effect Feburary 22, 2010. President Obama is on a mission to reduce the availability to young consumers in an effort to solve a problem that hurts so many of us college graduates today – we graduate with too much debt.

Here is a summary of the major changes that will affect young adults:

1) Less Access to Credit Cards Before the Age of 21
The CARD Act’s most significant rule is putting the lockdown on availability of credit cards to young adults. Reckless spending has always been an activity that people identify with the similarly ruthless lives of many young adults. Well, the time has come to limit the spending power of everyone under the age of 21.

• Credit cards can no longer be issued to anyone under the age of 21 with the exception that
  (i) they have an adult (of at least 21 years of age) to co-sign the credit card agreement.
  (ii) or, they can provide proof that they are able repay the debt they incur.
• Pre-screened credit card offers cannot be available to consumers under the age of 21.
• Joint credit card accounts can only have their limits increased with the permission of the adult accountholder.

2) A Close Watch on College Campuses
College campuses are hotspots for credit card companies. Their pretty booths with free t-shirts, pens, toys, and other stuff will cease to exist within close proximity of campus locations. Hopefully, less college students will become victims of consumer debt.

• Credit card companies are banned from offering free goodies as incentives to get students to sign up for credit cards in or near campus.
• Companies must also disclose the details of their contracts with colleges and universities regarding their marketing towards students and alumni.

3) Promotion for Financial Literacy
A major reason why everyone is having problems with debt is because they didn’t learn how to handle money at an early age. Now, the government is taking the initiative to change this trend that is ruining the financial futures of people.

• The act will require certain federal agencies to examine federal financial and economic literacy programs available to the youth ranging from kindergarten to 12th grade and adults.
• They must also recommend methods of funding and promotion of financial literacy programs.

Some of My Predictions
I’m guessing I was fortunate enough to not be caught in the middle of these changes. For those who are actually financially responsible during their younger years, the Credit CARD act may be a slight, but not major, setback. Also, just because these particular provisions are targeting young adults, it doesn’t mean they are the only ones affected – parents should embrace these changes as well.

For the future I foresee that:

• there will be less credit card debt for college students
• there will be a larger burden on parents to support their children
• students will borrow more on college loans
• college students are no longer a profitable market for credit card companies
• credit card companies will find loopholes to extend credit to young consumers
• many co-signers will have their credit histories ruined
• personal finance classes would be a standardized educational requirement

Alcohol is prohibited to everyone that is under the age of 21 but we all know that law hasn’t much of a restraint. How will this act fair in making a difference?

What are some of your thoughts on this act and how it’ll affect the younger generations? Share some of your predictions on the effects of this legislation.

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Much like the need for an annual visit to your doctor it is always wise to give your financial health an annual checkup as well.

In the health report that your doctor gives you, the doctor alerts you to any potential health problems and gives you a diagnosis. Similar to a medical report, your financial reports will reveal any discrepancies that negatively affect your financial well-being.

Regular medical exams are safeguards to good long-term health because any problems will be brought to your attention and reduce the damage that would be done. Regular financial checkups are just as important to long-term financial stability and freedom. If you found fraudulent activity on your credit report, you’d be able to solve the problem early instead of having the identity thief ruin your credit – something that would be detrimental to your financial future.

Fortunately, reviewing your financial reports do not carry the same costs as a medical checkup – in fact, it doesn’t cost you a dime. No insurance, no co-pays, and no fees. Everything is FREE (many thanks to the Fair Credit Reporting Act).

Start your financial checkup now:

Your Credit Report

• Visit AnnualCreditReport.com.

This is the only place you can obtain all 3 credit reports for free – one each from Transunion, Equifax, and Experian. The numerous ads and jingles for places offering “free” credit reports on TV are all false. You may choose to view all three annual reports at once or spread them out over the course of the year.

Your Credit Score

• Visit CreditKarma.com.

Firstly, you should be aware that the credit score from CreditKarma is not a FICO score. Their credit score is a TransRisk score based on your Transunion credit report. A FICO score, which most financial institutions use, is rarely available for free. Nevertheless, the CreditKarma score serves the purpose of analyzing your credit to point out areas of concern and to show you places where you can improve your credit.

Your Banking Report

• Visit ChexSystems.

Sure there is such a thing called a “banking” report. ChexSystems is a consumer reporting agency just like AnnualCreditReport.com. A ChexSystems consumer report consists of information such as security alerts, bad account history, and inquiries under your name with regards to your deposit accounts such as savings and checking (take a look at a sample ChexSystems report here).

Curing Your Financial Woes
Unlike a medical checkup, you will not have a professional beside you to treat your financial health because you are solely responsible for your financial habits. Luckily, there is a bunch of resources online (e.g. personal finance blogosphere) that can help you if you discover that your financial health isn’t doing too well.

If need be, don’t be afraid to visit a financial professional to answer your questions and solve your problems.

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Ever played a game where you have to level up and get more stuff and finally be the one with the highest rank, level or score? If you have, then you can understand how unnecessary such a feat can be. It seems as if everyone has been fretting over a few points on the credit scores they receive from different credit bureaus. Each credit bureau has different records of a person’s credit history and therefore, yields different credit scores. With credit taking control of our lives, this is a reminder not to go nuts over it.

• A Slight Difference of Scores Doesn’t Make A Difference
  There is practically no difference between a FICO score of 750 and 800. Both scores are great scores and they both warrant low interest rates but going from a score of 750 to 800 takes quite a while. The prominent concern of most people is the drop in their credit score from closing a credit card account. It is conventional wisdom that says you shouldn’t cancel a credit card if it has a long credit history and a substantial line of credit. But, if this card was a reason for racking up a large amount of debt, it would be financially healthier to remove it.

• Credit Means Nothing If You Don’t Need It
  Have you ever wondered what Bill Gates’ credit score was? It may be common to think that the wealthiest people in the U.S. also have the highest credit score. But, for a guy who has billions, he probably doesn’t need a line of credit. Therefore, his credit score is not necessarily the highest and it is possible to get a credit score higher than Bill Gates (but he most likely doesn’t even care what his credit score is).

• High Credit Score Isn’t Everything
  While a high credit score will come in handy when applying for major loans, it is not a 100% guarantee that you will get the loan. A credit score is based on credit history but current financial situations have an effect too. So, if I had a FICO score of 800 from paying off my mortgage and student loans over a long time and I recently became unemployed, I am not the best candidate for a loan since I don’t have income to repay it.

Yes, 95+% of the nation will need credit at some point but it is futile to worry about a credit score when it won’t matter in the near future. This is to advise those who purchase credit scores on a regular basis even thought they don’t need to. If there is any concern of credit fraud, spread out the 3 free annual credit reports over a year and use them to check for it.

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A couple days ago, a friend asked whether checking his credit report would hurt his credit score. After telling him that it didn’t, I realized that there is a lot of information on what can hurt your credit score. What about the things that do nothing to your credit score?

The Types of Credit Inquiries

A soft pull or inquiry is a request to see your credit report by a party that didn’t receive your consent to do so. Account reviews made only by you also fall under this category.

A hard pull or inquiry is a request to see your credit report when you authorize a party to do so. Applying for a credit card or loan would result in a hard pull by the bank or institution.

Things With No Effect On Credit Score

1. Ordering your credit report or credit score.
   Whether your order your free credit report or myFICO score, doing so is considered a personal account review, which is a soft inquiry.
2. Asking for a lower interest rate on your credit card.
   Just talking to a customer representative isn’t going to result in a negative consequence. In fact, your credit score may end up increasing if you get the lower APR. But, you still might want to be careful about making this move.
3. Having an overdraft on your checking account.
   Unless your bank reports you to a collection agency for the overdrawn amount, the only penalty would be the overdraft fee.
4. Receiving credit counseling.
   Seeking help with your debt doesn’t affect your credit. But, the debt management vehicles you use as a result of credit counseling could hurt your credit score.
5. Making multiple payments in a single billing cycle.
   All that matters to the credit card company is that you pay the minimum due for the month. Multiple payments in a billing cycle means nothing to your credit score.
6. Getting married.
   Both spouses keep their own credit history and therefore, have their own individual credit report and credit score. Opening joint accounts, on the other hand, would create a new credit profile with both names on it. And joint accounts would have an effect on individual credit histories.
7. Getting divorced.
   Just like when getting married, each individual has their own credit histories, except for joint accounts. The act of divorcing does nothing to your credit score. You still have to pay the debts on joint accounts. The best route is to inform all creditors of the divorce and divide the debt. This way, if one person doesn’t pay their share, the other won’t suffer from it.
8. Receiving “pre-approved” credit card offers from banks.
   When banks get the information that determines you as pre-approved, they do a soft pull on your credit report and that is not seen by creditors.

While many things will hurt your credit score, many things won’t. So now, stop fretting about whether this and that will affect your credit score.

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