The Basics of Credit

by Emely Pazos

Credit Rundown

What is credit? Credit is the ability of a customer to obtain goods or service before payment. Depending on the trust of a payment being made in the future. Although, this is a big concept of money, there are different forms. For example, personal loans, credit cars/store cards, secured or unsecured loans, etc. These forms can be alternatives to smart consumers who know they can make payments before or by a specific due date. In addition to applying, credit scores are a big factor that determines credit limit. Credit reports also play a role in extending your credit, being sent to lenders that will overview your credit history and approve or disapprove.


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.

The Credit Card 'Trap'

5 Credit Card Tips:

  1. Pay off balance every month, one can avoid paying interest on credit card purchases by paying the balance in full each monthly billing cycle.
  2. 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.
  3. 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.
  4. Don't exceed 30% of your total credit limit. Credit utilization ratio is the % of total available credit that is being used.
  5. 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.