The Basics of Credit
by Emely Pazos
Credit Rundown
Advantages:
- Credit cards make it easier to buy things, many don't like carrying large amounts of cash or some companies don't accept cash purchases (airlines, hotels, and car rental agencies). Useful in times of emergencies!
- Can offer additional protection if the consumer bought something that was lost, damaged, or stolen. Credit card statements can vouch for the purchases if original receipt is lost or stolen.
- Building a Credit Line: having good credit history is important, especially when applying for other credit cards, loans, rental applications, or even some jobs.
- Additional benefits: discounts from particular stores or companies, bonuses such as free airline miles or travel discounts, and special insurances.
These Advantages can be super helpful as long as one remembers their spending limits.
Disadvantages:
- Can encourage people to spend money that they don't have. Although it may seem like 'free money' at the time, one will have to pay it off and the longer one waits the payments will build up. Which is where credit card companies charge interest each month on the money that was borrowed.
- Credit card companies charge big amounts of interest on the balance that you don't pay off at the end of each month. Unfortunately this is how they make their money and how most people in the United States get into debt and even bankruptcy.
- Credit card fraud is a common disadvantage, but unlike stolen cash there can be a solution to the problem. If card is lost contact and report to the credit card company immediately.
Credit BureauA company that collects information relating to credit ratings of individuals and make it available to credit card companies, financial institutions, specific jobs, etc. | CreditworthinessAn assessment of likelihood that a borrower will default on his or her debt obligations. Based upon factors, such as an individuals history of repayment and credit score. | Interest (APR) An annual percentage; annual rate that is charged for borrowing or made by investing. Represents the actual yearly cost of funds over the term of a loan. |
Credit Bureau
A company that collects information relating to credit ratings of individuals and make it available to credit card companies, financial institutions, specific jobs, etc.
Creditworthiness
An assessment of likelihood that a borrower will default on his or her debt obligations. Based upon factors, such as an individuals history of repayment and credit score.
The Credit Card 'Trap'
- Pay off balance every month, one can avoid paying interest on credit card purchases by paying the balance in full each monthly billing cycle.
- Use the card for needs not wants, for instance, emergency situations or temporary loan to yourself and then pay back the amount ASAP to avoid accumulation interest charges.
- Never skip payment, pay your bill every month, even if you can only afford the minimum payment. Missing one could result in a late payment fee, a higher interest rate and a negative mark on your credit score.
- Don't exceed 30% of your total credit limit. Credit utilization ratio is the % of total available credit that is being used.
- Resist the temptation to spend more than you can pay off each month, and you'll enjoy the benefits of using a credit card without interest charges.