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Cutting Your Costs:
Strategies for Saving Money
On Loans and Credit Cards

Loans and credit cards provide great consumer benefits, but as with any form of borrowed money, you've got to be careful about how you manage credit. Here are tips for saving money on credit products — in your basic financial affairs, when shopping for new credit, and when using loans and credit cards.

Getting a Grip on Credit

1. Pay your bills on time to maintain a good credit record and qualify for low rates. Don't wait until the last minute to pay your monthly bills. Not only will you incur late-payment fees, but perhaps more importantly you risk triggering higher interest costs. That's because your payment history on your debts and bills is one of the biggest factors in your credit report and credit score.

A credit report is a compilation of how you pay your credit card bill, loans, rent, and selected other debts and bills. A credit score is a number that is based on your credit report and reflects your financial responsibility. Both are part of your overall credit history, which can determine your chances for a low-cost loan or a lower interest rate on a credit card.

While one or two late payments over a long period of time may not significantly damage your credit history, if at all, making a habit of missing payments can result in a higher interest rate, higher fees or both when you apply for any type of loan or credit card. Lenders put more emphasis on your recent payment history, so be particularly careful with payments in the months before you apply for a loan.

Consumers who pay their credit card bill late may face a major hike in their interest rate — often to between 29 and 35 percent. Late payments on that card also can trigger rate increases on other cards or loans, especially if your credit record shows other signs of risk.

2. Don't have "too many credit cards." There are good reasons to have at least two credit cards, but some people collect a stack of cards, including those from stores and oil companies, several of which they rarely use. One problem with having a lot of credit cards is that lenders look at the ones with no existing balance or a very low balance and conclude that you have the potential to use them and get into debt. Even if you've proven in the past to be a responsible user of credit, these "extra" cards could come back to haunt you the next time you apply for a mortgage or other loan.

"There is a cost to having too much credit," said Suzy Gardner, an FDIC bank examination specialist and an expert in consumer credit issues. "Although individual circumstances vary, having more credit available than what you can reasonably use, need or afford can hurt you in the long run."

Example: You have several credit cards and the combined outstanding balance on them is $15,000 below your credit limit. Then you apply for a home loan. The mortgage lender may question your ability to repay both a mortgage and $15,000 worth of new purchases on your credit cards. And, your overall credit score can suffer, resulting in the lender charging you a higher interest rate or denying the loan altogether.

One solution is to cancel the credit cards you rarely or never use, preferably well before you apply for another loan. Start by closing your newer credit card accounts — that's because your credit score can be lowered if your credit history appears shorter than it really is. Another option is to ask your card issuers to reduce your credit limit.

3. Check your credit report for accuracy. Something as simple as correcting incomplete or erroneous information in your credit record may be enough to qualify you for a better interest rate on a loan or credit card and save you hundreds of dollars each year in interest payments. For example, if you always pay your loans on time, but your credit report shows late payments, you'll want to correct that.

By federal law, you are entitled to one free copy of your credit report every year from each of the three nationwide credit bureaus — Equifax, Experian and TransUnion. Each company issues its own report, so it's smart to check each one. Although you can ask to receive copies from all three credit bureaus at the same time, you also can spread out your requests throughout the year to check for major changes or inconsistencies.

Identity theft is another reason to regularly review your credit reports. Make sure an ID thief hasn't opened credit cards or other accounts in your name to commit fraud.

4. Periodically review your existing loans and credit cards with an eye toward saving money. "Talk to a customer service representative at your bank to make sure you're signed up for the accounts and features that best fit your needs, especially if your financial situation has changed recently," said Janet Kincaid, FDIC Senior Consumer Affairs Officer. "For example, if you tend to carry a balance on your credit card, find out if you qualify for a credit card with a lower interest rate or other features that can cut your costs."

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