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Credit

$uccessful start

What is credit?

When you use credit, you are borrowing money. A lender gives you cash now to make a purchase, and you agree to repay that amount over time, with interest rates and sometimes fees also applied to the borrowed amount.

What are the benefits of a credit card?

There are some risks with using credit cards, but there are also some benefits. For instance, you can use your card during emergency situations, it is convenient, and it is a safer option for online purchases. It is also safer than carrying cash and may include additional benefits such as "cash back" and "buy now, pay later" options.

What are the rewards of using credit wisely?

Managing your credit well will provide many benefits. Potential landlords, car loan lenders, and employers in fields such as banking and government will all review your credit and payment histories. A good payment history demonstrates responsibility—a trait most employers seek.

What are the risks of credit cards?

Annual, late, and cash advance fees add up quickly. The biggest risk of using a credit card is also its greatest benefit: convenience. It's very easy to make an impulse purchase, and this can lead to negative credit card habits. Many credit cards can raise interest rates up to 29.99% in just a few months.

What do I need to know to evaluate a credit card offer?
  • Annual Percentage Rate (APR) — APR is like a price tag on the borrowed money. On a loan or credit card offer, it attempts to sum up the total price of borrowing the money.
  • Interest Rate — This is the charge attributed to receiving and using the loan amount, shown as a percentage of the loan amount. For example, if I borrow $100 at an interest rate of 10%, I'll pay $10 additional for the privilege of using the borrowed $100. (Note: When you make a payment, the money is applied first to fees, then to interest, and last to the principal.)
  • Fixed or Variable — Fixed rates don't change throughout the life of the loan. Variable rates, by contrast, have an adjustment period and can change annually, monthly, or quarterly. The longer the adjustment period, the less frequently the rate will change, which is more beneficial for you, the borrower.
  • Grace Period — The grace period is the number of days you have before you'll be charged interest on your purchase amount, usually between 20 days and one month. It encourages you to pay off your balance within one billing period. The longer the grace period, the better off the borrower is.
What are some of the fees associated with credit cards?

There are many fees associated with credit cards. Late fees average $29. Annual fees range from $25 to $60. If you exceed your credit limit, it can cost you as much as $25 extra per purchase over the limit. There are also cash advance fees, and transferring your balance can include a fee. Also, being late on one payment can increase your interest rate immediately.

What is the true cost of charging $100?

Suppose you charged $100 each week for one year and made only the 3% minimum monthly payment. Because interest is also accumulating on your card's outstanding balance, your year-end balance would be $4,713. This is the total after deducting the $960 in payments you made throughout the year. By the end of the year, your reasonable payments will have grown to $146. Even if you cut up your credit card after that one year, it would take you 19 years to pay off that one year's worth of purchases, and you would end up paying $4,845 just in accumulated interest.

What is a credit report?

A credit report is a history of your ability to manage credit. Think of it as like a transcript of your credit management skills: It summarizes your past failures and accomplishments, and it gives you an overall credit grade, known as a credit score. Lenders report your payment history, amount borrowed, credit limits, and delinquencies to credit reporting agencies every 30 days.

What is in your credit report?

Your credit report has a summary of key information that pertains to you: your personal information, name, date of birth, and Social Security Number. It also includes your credit history from banks, retail stores, and finance and mortgage companies. It includes public records, tax liens and bankruptcies, and court judgments. It lists other authorized parties who have received your credit report. (Note: Your report does not mention your race, ethnicity, gender, religion, country of origin, checking or savings account information, medical history, major purchases paid in full with cash or check, or business accounts, unless you are personally liable for your business's debt.)

Where can I obtain a free credit report?

You are entitled to one free report each year from Equifax, TransUnion, and Experian. You can decide whether receiving one credit report every four months, or all three at once, suits your needs better. Visit AnnualCreditReport.com for more information, or call 877-322-8228.

What is a credit score?

Think of a credit score as a test score: the higher the score, the better the grade. The more negative marks on your credit report, the more points taken off of your score.

Once a creditor has a score, they assign a letter grade. This letter grade translates directly into the rate and term you'll receive in any loan you apply for. A and B grades produce loans that are good for borrowers. Most top banks lend only to A- and B-grade people. Those with less-than-perfect credit are lumped into the subprime category. Just like bad high school grades limit your choice of colleges, bad credit grades and scores limit your choice of banks and lenders.

What determines your score?

The two biggest determinant factors are payment history (35%) and amount owed (30%). Other factors include length of credit history (15%), new credit (10%), and type of credit used (10%). Generally, a longer credit history will increase your score. New credit is based on how many new accounts you've established, how long it's been since you opened them, and how many requests for credit you have made. The type of credit used is based on the overall mix of credit cards, installment loans, mortgage loans, etc. that you have. The more balanced the mix, the more likely this factor is to improve your score.