Road to Credit Awareness

Credit Cards

The Basics of Credit

There are some items where you just won't have enough money to pay for it. Yet, you don't want to wait until you get enough money to buy it. There is the option to buy now and pay later, meaning borrowing money to buy what you need or want, and paying it later known as credit.

Credit can come in two forms: personal loans and credit cards. Allowing you to buy a home, pay for higher education or anything else you want or need.

Unfortunately, credit isn't free. Each time you purchase something using credit you have to pay an interest (APR), (Annual Percentage Rate) which is a percentage on the amount of money you borrowed.

The credit you receive is different from the credit another person might receive. The credit is based on your creditworthiness. Your creditworthiness is based on the capital (amount of you own, savings, investments), character (seeing if you are a responsible person, paying your bills on time), and capacity (are you able to repay loans, if you have any other debt payments).

Lenders, people you give you the credit (lend you the money), get information from credit bureau which provides information about each adults missed rent payments, if they been sued, bounced check (check that hadn't had money on it), and if the person experienced bankruptcy also known as credit report. Based on that information, current debt, the amount of time of credit history, new accounts, and the type of credit used the credit bureau will assign the person a score. The score is also known as a credit rating, ranging from 300 to 850.

Vocabulary Watch

Credit Cards: What You Need to Know

Credit card is borrowed money on a card given by a bank, or a business that allows you to purchase items or services on credit. You can use credit cards when paying online, or at the store. However, some credit card companies charge annual fees, a fee that you pay in order to use the card (like a membership fee).

Other credit card companies have the customers have a limited amount of money that they can borrow, also known as a credit limit.

If you go beyond the credit when your buying items, or fees your credit card company might charge you over-the-limit fees.

Lenders charge you an interest rate on your credit card, when you borrow money. If you pay minimum amount on the credit card then the interest will increase. If you pay the current balance then the interest percentage won't increase.

Eventually for all the money borrowed, you have to pay over time to a certain date. If you miss a payment, based on your credit card company, you might have to pay a fee, known as the company charging you a penalty rate.

Smart Consumers: Don't Fall Into The Credit Card Trap

Tips to Being Aware of Credit Cards:

1) Don't borrow so much money, that you can't repay it (total debts should be no more than 20-25% of your take-home pay.

2) Pay off the entire credit total at the end of the month, so you won't be added any interest to the balance.

3) If the credit card company charges over-the-limit fees, plan out of what you are going to pay and make sure it doesn't go over the amount of credit you can borrow.

4) When choosing a credit card, choose the cheaper one, (the card that you will be able to pay off the annual fee (if any) and interest). Choose the one without annual fee, or the interest (APR) is the lowest