Credit

What you need to know about Credit and Credit Cards.

Basics of Credit

If you never had to deal with a loan or ever had a credit card, you may be asking yourself "what is credit?" Credit is a mechanism people use when they need money that they may not have now so instead they borrow and promise to pay back later. Credit comes in two forms; there are loans and credit cards. People usually take out loans or personal loans when they need a large sum of money for paying for things such as a house, car, or most importantly, an education. Credit cards are like debit cards, except the money isn't directly coming out of your account and at the end of each month, you receive a bill of how much you owe. Where you get your loan or credit card is known as the lender and you, as the lendee. Overall, credit seems amazing; however, there are a few costs to it. Nothing that good can ever be entirely free, can it? If you take out a loan or own a credit card, you'll become familiar with interest which is also known as your annual percentage rate. It is the extra amount of money you pay along with your regular payment. Depending on your credit score, it can range from a low to high percentage. Also, always try to make a payment on time or you'll have to pay a hasty late fee along with your bill. Whether or not someone is creditworthy depends on what we call the 3 C's of Credit. It concludes of Character, Capacity, and Capital. Character revolves around whether you appear to be a responsible individual that can be considered credit worthy. Capacity is what you are capable of paying for. For example, if you receive a small paycheck, it is most likely that you will not be able to pay for a large loan or an elite credit card. Capital is the value of what you own such as how much your house or car is worth. The 3 C's determine whether or not you are creditworthy; however, determining how much you can receive out of a loan or credit card depends on your credit score. Credit scores range from 300 to 850, 850 being excellent and 300 being poor. If you have an excellent credit score, you most likely would pay a lower interest on a loan or credit card and be able to take out a larger loan or better credit card than a person with a poor credit score. All this information and your own record is contained at the Credit Bureau. You can ask to receive a credit report to see your credit score and other information about yourself such as your debt.

Vocabulary Watch

Credit Cards: What You Need To Know

The Facts

A credit card is like a debit card; however, the cardholder is responsible for paying back expenses made with that card. Credit cards can be used just about anywhere and can be used to purchase anything. Although, having a credit card requires responsibility. The card is useful when you don't have the money to make a purchase, so you use the credit card to make the purchase and promise to pay it back later at the next bill cycle. However, credit cards are not free. Along with the bill, you'd have to pay back interest as well. Your interest rate (APR) depends on your credit worthiness and can be from 0%-23% in some cases. Some credit cards also require an annual fee just to have the card. Also, most lenders place a credit limit, so you only can purchase up to a maximum on that credit card which is beneficial because too much money used from the card can cause problems to your own budget in the future. If you go over the credit limit, you would have an over-the-limit fee which is undesirable if you're already low on budget. Be aware of penalty fees as well such as late payment which on most credit cards can be up to $35. Always keep an eye on your expenses and your budget when making purchases with a credit card.


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

Although credit cards seem enticing, you should always try to keep yourself safe when using them. One important rule about credit cards is limiting the amount of credit cards you have. If you have more than two or three credit cards, it can be hard to manage your expenses and soon you will be wallowing yourself in debt. Also, make a budget to control your spending. If you purchase items without having a clue of how much your bill will be at the end of the month and it comes out that it is more than you can afford, debt will be inevitable. Try to also make your payments every month to maintain a low APR and to avoid penalty fees and mounting bills from credit cards. Always try to make small payments. Do not go over your limit or it'll be costly in the end. If however you manage to be in debt, it is always better to be in debt that will benefit you in the end. Being in debt because of your education or your house is always better than being in debt for material items such as a car or clothing. Always be aware of where your money goes and maintain an eye on your credit cards.