How to use Credit the Right Way

The Basics of Credit

Credit is the idea of borrowing money from someone and paying them back at a later time. This means that you make a promise to pay back the money that was lent to you usually in the form of a legal contract. There are two main forms of credit. Credit may either be from a credit card, or a personal loan. Credit cards are plastic cards that let you purchase items/services from businesses and then the credit card company will charge you for these purchases at a later time. Some important costs of using credit including a risk of putting yourself into debt, having to pay back interest, and having a bad credit score. The people who determine if someone has good credit or bad credit is the Credit Bureau. They are responsible for retrieving data about people and then determine what their credibility is based on that. Credit Scores range from 300 to 850. These scores reflect your creditworthiness which is based on the three C.s, character, capital, and capacity. Almost all lenders, or the people who loan out money, charge an interest rate. If someone gets credit then they get whatever the lender will give out to that person based on their credit score. A credit report is requested by businesses of people that they may lend money to so that they can ensure their money is going to be paid back.

Vocabulary Watch

To understand what the Credit Bureau looks at to determine your credit score here is some basic definition of the three C's. Character is the idea of how the person applying for the loan handles themselves and how they previously paid back other loans/debt. For example if someone pays on time every time they get a bill, then they will have better credit, but if the person never paid a bill in his/her life then they will have horrible credit. The next "C" of the three is capital. Capital is all the other assets the person owns that the lender can claim if the person fails to pay off the loan on time. Capital can be anything from cash, saving accounts, property such as houses or cars, and even investments. The last "C" of the three is capacity. Capacity means how much money a lender can borrow to the person but still feel comfortable about it based on the person's income and job security. Now you know more about the three "C's" to help you with understanding credit.

Credit Cards: What You Need to Know

As I previously said before, a credit card is little plastic card that has the power to increase your credit or to increase your debt if not used responsibly. Credit cards are used to purchase items by borrowing money from the credit card company until a certain date where you either pay in full or pay in payments. Most credit cards do not have annual fees, but some do. This means that a service charge is charged to you for the services that accompany the credit cards. You can use a credit card just about anywhere today, from online shopping to buying your groceries as long as it doesn't go over the credit limit. There are both benefits and costs of using a credit card. Some benefits include increasing your credit score by paying off the credit card bills on time as they come in. This would allow you to receive higher loans and have lower interest rates because you have prove that you are creditworthy. Some costs of using credit cards is that you have to pay interest on the money you don't back right away. Credit card company also have penalty fees for breaking certain rules that were discussed in your contract such as an over-the-limit fee which means you get charged a fee anytime you go over the credit card limit set out by your lender in the contract. So obviously there are a lot of ups and downs of using a credit card and it is your responsibility on which way you will use it.

Smart Consumers Don't Fall Into the Credit Card Trap

One of the most important things when using a credit card is to pay your bill right away in full so that you do not have to pay interest or any late fine. Most credit card companies will offer a "minimum payment" option that will allow you to pay of your bill in a certain amount of days with small amounts of money each time you pay. What most people don't realize is that every time you pay in a small amount, you're being charged an interest rate that is added into the minimum rate. It seems very helpful that the credit card companies offer this to its customers, but in reality it is only benefiting the company.This is known as the credit card trap, and know you know how to avoid it as well as being a responsible consumer when it comes to credit cards.