Responsible use of Credit


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Nowadays almost everyone has a credit card. You can go to the store and find items that you want; but what if you don't have any cash? No problem, you can still go home with that desired item. All it takes is one swipe. But an important question is, is it worth the interest that you will pay later? If you buy a brand new television for $1,000 you could end up paying hundreds more in interest. We're not saying that you shouldn't have a credit card, in fact, you'll need a credit history to develop a good credit score which will determine your loans for things such as your first car, and your first home.This wiki page will help you learn to make the right decisions when it comes to the use of your credit card.

There are two types of Credit/ Loans/ Borrowing

1. Installment Loans
- These are loans given for cars, mortgage, schooling, etc.
- When given this loan you work out a set price in which you will pay back this loan every month, it does not change.
- You will know a set date to which this loan will be paid back
2. Revolving credit
- Credit cards such as Visa, MasterCard, or even store cards such as Old Navy or Sears.
- This is an agreement by which someone can borrow up to a certain amount and continue to borrow while still paying off the original loan.
- Interest rates for revolving credit are much higher than Installment Loans, there is no set monthly payment.
-Credit card companies like customers that use revolving credit because they make the most money from them.

What happens when you don't pay back what you owe?

Credit Cards: After even one late payment you can get late fees, a higher interest rate, and if you continually do not pay your bill your card will be cancelled.
Installment Loans: For car loans and mortgages your property will be repossessed, with student loans they will "garnish" your paycheck which means your employer will take it directly from your pay and send in to them on your behalf, you will never even see the money.


What is a credit score and how is it determined? Why is it important?

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  1. Payment History (35%) - this is your payment history on everything not just on credit cards
  2. "Credit utilization" ( 30%) - this is your current revolving debt divided by your limit. - best to keep this under 30%
  3. Length of credit history (15%)
  4. Credit Mix (10%) - whether or not you have both revolving and installment credit
  5. Number of times you check your credit score (10%) - it is recommended to check it when its free once a year, but checking it too many times will lower your FICO score.
Having a credit score above 750 is considered excellent. The range of credit scores is 300 to 850.
Maintaining a good credit score is important because it can determine whether or not you get a loan and at which rate you would get it for. Your credit score can also determine whether or not you get a job.
Your FICO score comes from the company Fair Isaac Cooperation, this company has three bureaus separately investigate the factors that come up with your score . These three companies are Experian, TransUnion, and Equifax, these three places may all have different numbers for you, but in the end they are averaged into one FICO score.

Example of Mortgage Rates according to your FICO score:
760 - 850.......4.8% Mortgage Rate
700 - 759...... 5.0% Mortgage rate

Responsible use of credit means paying off your bill in full at the end of each billing cycle.


What happens if I only pay the minimum balance?

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When you first get your credit card bill it may seem shocking, but what you must pay is going to be a very small number compared to what you owe. You can thank one man for that, Andrew Kahr. This man changed the minimum payment from 5% of what you owe to 2.5%. Well this seems helpful doesn't it you no longer have to pay as much at one time? The minimum balance being 2.5% may seem very desirable in the short term, but in the long run it could be the downfall of your financial stability. When you pay so little at a time you can end up in a endless cycle which will lead to you not being able to pay at all. You will keep making more charges because you will only have to pay a small amount back at one time, but that money adds up, and the remaining balance becomes larger and larger every month because of your interest rate which could be somewhere between 9 - 29%. So you may only be paying a small amount but when you continuously take 2.5% of an increasing number it'll seem as though you can never get your balance owed down to zero, and for you to do so it would take years, and you would most likely have to stop making charges all together and just pay what you have already owed. It is always a good idea to pay your balance in full at the end of each month rather than only making the minimum payment.

Responsible use of Credit Cards

  • Don't use your credit card unless you know you can pay it back at the end of the next billing period, if you have cash or a debit card on you it may be a wiser choice to use those. Ideally when you charge things you want to pay it back at the end of each month so you get the benefits of the Grace Period.
  • Always pay your credit card bills on time, your interest rate can sky rocket after only one late payment. You will also have late fees to worry about.
  • When finding a credit card look for one that's best for you. You want good benefits, low interest rates, and a contract you understand.
  • Keep track of your FICO score by getting the report at least once a year, this score is crucial to your financial future.
  • Just because you have a certain limit doesn't mean you have to use it. It's in your best interest to charge less than what you are allowed. ( see #2 of "What is a credit score..")

Glossary:

Grace Period - When you pay the total amount of what is charged every month you will not pay interest, the company in return will make no money from you.
Limit - The total amount of money a credit card company will allow you to charge.

Videos:




Links for more information:

Monitoring your credit score 1 month loan
How your FICO score is calculated
Credit card tips for college kids
Information on student loans

citations:

*all pictures from google images:
http://isocompound2009.org/program/
http://www.uscaonline.com/BBB_Complaints_against_Credit_Card_Industry.html
http://www.mybudget360.com/endgame-credit-card-nation-40-year-credit-card-bull-market-over/
http://www.want2rich.com/2011/05/personal-finance/methods-and-tools-used-in-credit-card-industry-to-detect-fraud
*all videos from youtube:
www. debtguru.com
www.watchmojo.com
*all information from notes