Using Credit Cards Online

This article is part of the Securing Your Money Online series.

Let’s face it, some of the best deals you’ll find on the stuff you need (or want) can be found online. You could find yourself shopping all over the Internet at online stores you’ve never even heard of before finding fantastic bargains. But then you have to wonder if the sites are legitimate. Do they have good security? Will my credit card information be safe?

There are things we can do in the virtual world to protect ourselves from credit card fraud. You’ve probably read a story or two about credit card information being stolen from an online store. In some of these cases, hackers were able to break into the store’s databases by exploiting various insecurities in the shop’s website or network setup. In other cases it could have been an employee stealing this information. Either way you could be at risk. If you shop online and you use a credit card for purchasing there are ways to minimize the impact. One of those ways is to use virtual credit cards.

Virtual credit card numbers, also called one-time use, single-use, controlled payment number, or disposable credit card numbers, are an easy and effective way to help avoid the hassle of dealing with fraudulent charges. A virtual credit card number is basically an alias for your real account number, keeping your real account number private. If that store happens to get compromised, they won’t even know what your real account number is. Your virtual credit card number can be customized to restrict the credit limit or expiration date.

Depending on your bank, you may or may not even have the option to use a virtual credit card. If you shop online, I recommend you look for this feature when you are evaluating credit cards. My credit card is with Citibank and they support the use of virtual credit card numbers. Other banks, such as Discover and Bank of America, also have these capabilities with their cards. With Citibank, you can use their software applet in Windows to create a new card, or their online web interface if you need to generate a card number with a Mac or Linux box.

Generating a virtual credit card number is simple. Here is a short example of using a virtual credit card generator, specifically Citibank’s version.

Using a Virtual Credit Card Generator

After you login, you will get a screen which shows you all the options available, including viewing past cards and generating a new card. We start by clicking on “Generate Virtual Account Number”.

If you click “OK” on the next page, Citibank will generate a virtual credit card number with no spending limit which expires the following month. I rarely use this option. Instead, at this menu I select “Advanced Options” at the bottom.

With the “Advanced Options” menu, you have two options. You can create a card with a spending limit (which I always set) or you can create a card that has a spending as well as a time limit (which I select for cards I am using for recurring expenses such as Vonage).

Once you generate a card, you get the 16 digit card number, a CVC (3 digit card verification code), and the expiration date. If you are using Windows and the Citibank applet, you can have the applet automatically enter the payment information into the shopping checkout form you have up in your browser.

Although the example uses Citibank, Discover seems to use the same software (according to Wikipedia, they both use Orbiscom).

You may be thinking, “but why would I do this when I’m not liable for fraud on my card anyway?” For me, this feature adds peace of mind. If a virtual credit card number is stolen, I can look back at the logs and see exactly which merchant I used that card to purchase from. On top of that, they are restricted in how much they can charge due to the limits I set on the card. I don’t have to worry about someone maxing out the card and screwing up any automatic charges I have set up on it.

Using a Debit Card Online

If you normally use a debit card, I highly recommend you don’t use it online. Not only is this tied to your banking account with your real money, these cards don’t always offer the same protections as credit cards. If someone gets a hold of your debit card information and manages to spend all the cash from your bank account, you may be unable to access it until the bank finishes their investigation into the matter. It’s your money on the line, not necessarily the bank’s.

If you aren’t using virtual credit card numbers for your own online shopping, I highly recommend you give them some serious consideration. Now I feel I can be even more frugal by selecting the best deals I find online without having to worry as much about my credit card number being stolen. If you don’t have a card with one of these banks, or can’t use virtual credit card numbers for some reason, my recommendation would be to avoid using your credit card online except for at established online stores. In the end, you should only be liable for a small amount, but dealing with the hassle just doesn’t seem worth it to me. You can make your own decision as to how much risk you are willing to take with your credit card. We’ve got a friend who’s had her credit card number stolen 3 times from online stores. 3 times. Now, she only uses virtual credit card numbers online. For me, it’s a feature that is indispensable and I wouldn’t shop online without one.

Virtual credit cards - don’t shop online without one.

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5 Myths That Can Hurt Your FICO Score

Raise your FICO score to help save your pennies Credit - it’s not just for credit cards. Credit plays a major role in determining your ability to borrow money, but it is used in many other places that you might not think of. For instance, some employers will check your credit history as a pre-requisite to your being hired. When you rent a home, most landlords will check your credit history to ensure you aren’t too much of a risk to rent to. And when you want to shop around for a better price on your insurance, you better make sure your score is up to snuff.

Do we really understand how our use (or abuse) of our credit can affect our FICO scores? Your FICO score is a vital indication of your “credit health” and that little number can make a huge difference (especially in today’s credit climate) in what you pay for borrowed money. It is in our best interest to keep our FICO scores as healthy as possible.

To help separate fact from fiction, let’s look at 5 FICO score myths that if followed could do more damage than good.

1. Close old accounts you aren’t using to boost your score.

Although it is true that having “too many” open accounts can hurt your score, by the time you have opened the accounts it’s too late. The act of opening too many accounts in a short time frame is the problem, and closing them will not improve your score. Especially not with the older cards - in fact it could do more damage.

How it can hurt you: Closing your oldest accounts will make your credit history seem shorter and the longer the history the better. FICO looks at the age of the oldest account, the newest account, and the average age of all your accounts when considering the length of your credit history. This history makes up 15% of your score. Also, if you close out these accounts you will be decreasing the amount of untapped credit you have, which in turn makes the debt you do have appear to be more sizable (this is reflected in the debt-to-credit ratio).

Keep the old accounts - make sure they don’t have any annual fees or costs associated with them and put the cards somewhere you won’t use them. If you still want to close accounts for other reasons, take out the youngest with the lowest credit limits. Just be aware it won’t increase your score.

2. Checking your credit report too often can hurt your score.

Often people are confused about what kind of credit check actually affects your score. Ordering your own credit report/score has no negative effect. It’s when you apply for new credit (e.g. a home/car loan or new credit card) when your score could take a hit.

How it can hurt you: If you aren’t checking your credit report you aren’t checking for inaccuracies. To keep your score at it’s highest you must check your report periodically to make sure the accounts and their information are correct. This is even more important now that identity theft is on the rise.

3. Large amounts of unused credit or high credit limits will lower your score.

Having high credit limits available on your cards is actually good, provided you don’t actually use that credit. Your debt-to-credit ratio, which is 30% of your FICO score, is the amount of revolving debt (credit card balances) in relation to the amount of available credit (credit limits). Credit Bureaus use this measurement as a way to judge your ability to manage the credit you have. You want this ratio under 30% if you can manage it.

Example: You have 3 open credit cards with credit limits of $4000, $2000, and $3000, equaling a total credit limit of $9000. You have $1500 on one card and $1000 on a second card, equaling a total credit card balance of $2500. You have used $2500 worth of your $9000 available credit, resulting in a debt-to-credit ratio of 28%. Only 28% of your available credit is being used at this time. The higher the percentage the more likely you could be considered overextended which hurts your score.

How it can hurt you: If you are intentionally keeping your credit limits low (I have a friend who would call and have her credit limit reduced if the credit card companies tried to increase it) you are hurting your debt-to-credit ratio by making your balances appear to be a larger chunk of your available credit. As your credit limit increases (or if your balances decrease) this ratio will lower which results in a more favorable score.

Using the example above, if one of your cards raised your credit limit by $1000 (with your balances remaining the same) your debt-to-credit ratio would drop from 28% to 25%. On the other hand, if you were to cancel the card with the $3000 credit limit without paying down on the other balances of $2500 to counteract the loss of credit limit, your new ratio would be 42%. Ouch!

4. You can get rid of unfavorable history by cancelling the card or paying off the balance.

One of my friends with a less-than-perfect credit history cancelled all her cards in the hopes they would be completely removed from the credit report. Not so. Your payment history makes up 35% of your FICO score and closing the accounts with detrimental histories will not make the negative information disappear. While paying the balance in full is a great move and can improve other areas affecting your score, it will not remove the black smudges on the payment history.

How it can hurt you: Late payments associated with that account won’t go away if you cancel the account. Closing accounts can hurt your debt-to-credit ratio (unless you pay down your other debt to compensate) and it can also affect your length of credit history if you are eliminating older accounts.

If the adverse information is inaccurate be sure to contest it. But if it is correctly reported the best bet is to pay the cards on-time, even if it is just the minimums. Use the card to start building a good solid history of paying on-time and eventually your score will improve.

5. Never using credit cards (or not having any credit cards) will raise your score.

Not having cards may help control your spending if available credit is too much of a temptation to splurge but it won’t help your score. Keep in mind that someone who has managed his credit responsibly will likely have a higher score than someone who has little to no history.

I have a relative that avoids credit cards. He buys everything outright and never carries a mortgage or car loan. Although this is ideal for avoiding interest it is not ideal in terms of building up a good credit history. His score is good but he wishes he was within “bragging rights” range. It is most likely the lack of history and active accounts affecting his score.

How it can hurt you: Having too little credit history can lower your score, and if you have no accounts older than 6 months you might not even get a score at all. They feel it is too little history on which to generate a score. If you have a long but less-than-stellar history and have decided to ditch the cards completely you are losing out on a chance to “redeem” yourself. FICO scores weigh the good and the bad and if you generate more good history your score will improve.

Avoiding paying interest is a great policy to have but that doesn’t mean you can’t build up a credit history. Only spend a small amount on a credit card (maybe charge gas on it) and be sure to pay the balance off every month in full and on-time. That way, you build a favorable credit history and still maintain a no-interest lifestyle.

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