Written by: Stephanie GonzaleZ
The Basics of Credit
● What is credit?
The ability to borrow money in return for a promise of future repayment. Future repayment includes interest.
Even though it makes buying what you want and when you want easy- Credit is not free money.
● What are the forms of credit?
There are three types of credit:
- Loans - they let you borrow money that must be repaid with interest. You can obtain a loan for a specific purpose such as financing a new car, paying college tuition and buying or renovating a home.
- Installment loans - are made for a fixed amount. This type of loan is repaid in fixed monthly payments over a specific period of time. Auto loans and mortgages are examples of installment loans.
- Credit cards - allow repeated transactions up to a maximum credit limit. Each time you charge something you are borrowing the money until you pay it back the credit card company adds interest (APR) charges to your account.
● What costs are associated with credit?
- Late Fees - they are charged when you fail to pay the minimum payment due by its due date.
Remember late fees are avoidable and late payments can harm your credit score, making it harder for you to get credit in the future. Every time you send a late payment or miss a payment the Credit Bureau is alerted and the incident is recorded on your credit history permanently. The Credit Bureau also sells that information to lenders
● What determines if someone gets credit and how much they get?
The Four C’s determine how much credit you receive -
Character - Sense of financial responsibility. Are you trustworthy? Honest? Have a stable job? Have a savings & checking account?
Capacity - Do you have the necessary means to pay back the loan? Are your expenses balanced with your income?
Creditworthiness - a measure of your reliability to repay a loan. ability and willingness What’s your credit history? Do you pay your bills on time?
Collateral - What do you have of value? i.e. for car loans they can reposes your car
TIP: It is important to request credit reports once a year in order to to make sure the information listed on it is correct. Monitoring your accounts can prevent you from being a victim of identity theft.
However, you might order your credit report more frequently if you're trying to repair your credit or if you expect to apply for a major loan soon.
-The amount you get in an unsecured loans is based on your credit history and ability to repay the loan from personal income. Repayment is usually through fixed amounts installments over a fixed term.
Secured loans have fixed interest rates and require collateral such as a savings account, stocks, car, home, etc.
Credit Cards: What You Need to Know
● What is a credit card?
A plastic card issued by a bank, business, etc. for the purchase of goods or services on credit. A credit card will have a certain credit limit depending on your credit score.
● Where can you use credit cards?
Credit cards can be used all over the world. If the bank with which the credit card is registered is well known worldwide. Credit cards are also useful since you can even go to different countries without having to go and convert the currency.
● What are the benefits and costs of using credit cards?
PROS: The benefits of credit cards is the fact that the are easy to carry and are accepted in many places around the world. If payments for your credit card are paid on time and the credit card is used responsibly it can also help your credit increase
- Annual fee
Some credit cards may require an annual fee. This is the yearly cost of owning a credit card.
- Over the limit Fees
Companies charge a fee if your balance exceeds your credit limit.
- Penalty Fees
They are given when you send your payments late. You interest rate(APR) can become higher when you send payments late.
-You MAY also be charged fees for returned checks, returned cash advance checks or stop-payment requests.
Types of Credit cards:
- Low-limit credit cards: The low amounts of credit help you to owe less money but still be able to use credit easily
- Pre-paid or secured credit card: Pre-paid credit cards require you to put money up front. A great benefit from this is that you can only spend what you have in it.
- Student credit cards- are built for students and are made specifically for those who have very little credit history .
- Know what you are signing
- Read and understand policies before getting credit card or loans
- read the fine print
- Compare prices, interest rates, fees and grace periods
- Make paying back your loans/debt a personal responsibility
Smart Consumers: Don’t Fall Into the Credit Card Trap
- Sign your credit cards as soon as you get it
- Don’t share information
- Use secure browsers
- Don't max out
- Check credit history to avoid identity theft
- Keep track of what your charge
- Make payments on time