Credit and Debt Management
What is Credit?
Credit is a contractual agreement in which a borrower received something of value now and agrees to repay the lender at a later date. It allows you to buy now with the promise of paying later. Two main types of credit include loans and credit cards.
Loans let you borrow money that must be repaid with interest. Loans may be obtained for a number of reasons: purchase of a car or house, paying for college tuition or renovating a house. Federal student loans are offered with lower interest rates to assist with paying for your tuition, fees and other educational expenses.
Credit cards are the most common type of personal credit. They allow repeated transactions up to a maximum credit limit. Each time you charge something, you are borrowing the money until you pay it back. If you decide to pay the money back over time, the credit card company adds interest charges to your account. Each month, you will pay a calculated amount until the borrowed amount is paid in full. Credit card interest rates are typically very high and may range from 12%-25%. The longer you take to pay the money back, the more interest you pay on the money you borrowed. Credit cards are not bad, but using them incorrectly can significantly impact your financial future.
What should you know before obtaining and using a credit card?
- What is the interest rate?
- What is the annual fee (APR)?
- What is the late fee?
- What is the over-the-limit fee?
- Is there a grace period?
- What is the credit limit?
What is a credit report?
A credit report is a detailed report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness. A credit bureau is a company that collects your payment history from creditors, lenders, utilities, debt collection agencies and courts. They report how much you have borrowed, how you have repaid and other details about your borrowing behavior. A free credit report is available through www.annualcreditreport.com
The three main credit reporting agencies are:
What is a credit score?
A credit score is a statistically derived numeric expression of a person's creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts. Below is a chart of the items that factor into the calculation. Understanding how credit scoring works can help you manage your credit health.
How can I maintain a good credit history?
- Always pay your bills on time.
- Never borrow money you can't comfortably pay back.
- Borrow only what you need and know how much you owe.
- Contact lenders immediately if you expect to have payment problems.
- Limit your applications for new credit.
- Check your credit at least once a year.
- Create a budget to manage your expenses and stick to it!