Use credit to your financial advantage
This guide explains what you want - and need - to know about what credit is, how it works, and the ways you can use it to your financial advantage.
The guide also describes the warning signs of too much debt and ways to resolve the resulting problems.
using credit
when you borrow money to pay for something or use a card to charge a purchase, you’re using credit.
Using credit means being able to buy the things or services you need or want by borrowing the money to pay for them. When you arrange for credit, you agree to repay the lender the amount you have borrowed. You typically pay a finance charge, calculated as a percentage of the amount you borrowed, for the opportunity to use the credit.
Loans and lines of credit, of which credit cards are the best-known example, are the types of credit people use most often. Loans allow you to borrow a specific amount as a lump sum and repay over time. Lines of credit give you revolving access to a fixed sum of money. Revolving means that as soon as you repay what you have borrowed, you can borrow it again.
Two Faces of Credit
Credit has enabled many people to live better by paying for goods or services as part of their regular living expenses rather than having to wait until they could afford to make the purchase. It’s more available today to a broader range of people than it customarily was in the past.
In fact, most Americans use credit in one form or another: About 80% of US households have credit cards, most people who buy homes have a mortgage loan, and about 60% of college students (or their parents) use loans to help pay tuition.
But credit does have a downside. Although many people use credit wisely, some owe more than they are able to repay. It may be that they’ve used credit to buy food and gas as usual but have lost their jobs or are burdened by major medical expenses. It may be that they’ve been unrealistic about what they can afford, or that they haven’t recognized how deeply in debt they are. Whatever the reason, the consequences are costly and put access to future credit at risk.
Building good credit
there’s a clear road to qualifying to borrow.
If you want to be able to use credit, you must show potential leaders that you’ll live up to your end of the bargain. The way you establish this credit history is by borrowing and repaying on time. With a record in place, creditors are more likely to grant your new credit applications.
This can mean having a large enough spending limit on your credit card to be able to buy what you need. Or it may mean being able to get a loan to buy a house or a car, pay for higher education, or start and build your own business.
The Road To Good Credit
You can build a strong credit history if you use credit wisely over a period of time. It’s important not to wait until you need to borrow to think about whether you’ll qualify.
Get a credit card. The easiest first step in building a good credit reputation is usually obtaining and using a credit card on a regular basis. If you don’t already have a credit card, you can apply for one that’s issued by the bank or credit union where you have an account.
If you application is rejected, you can apply for a retail store card or a gasoline card. While the ways you can use these cards is more limited, using them wisely can help you establish your creditworthiness.
Make payments on time. It’s essential to make at least the minimum payment on your credit card bill by the date it is due. In addition to the late fee you’ll be charged each time you miss the deadline, you put your credit card reputation at risk if you pay more than 60 days late at least three times.