FINANCIAL LITERACY LEARNING CENTER

PERSONAL MONEY MANAGEMENT

CREDIT AND CREDIT CARDS

CREDIT IS THE ABILITY TO BORROW MONEY

INS AND OUTS OF CREDIT CARDS

Using a credit card is similar to taking out a loan: It allows you to buy now and pay later. If you carry a balance on your card, you will be subject to paying interest charges. Some cards do offer “grace periods” or 0% interest for a set amount of time, but it is important to understand what that is. Some credit cards will also offer freebies, such as cash back or bonus points for travel. As appealing as credit cards can be, you must be careful not to fall into a credit card trap because purchases, interest charges and possible penalties can add up fast, leading to debt and having a negative effect on your credit score and future borrowing.

TIPS ON CORRECTING CREDIT CARD PROBLEMS

If you have found yourself in credit card debt, here are some helpful tips to help you get out. You can start by reducing your expenses by paying off the balance on your highest-rate loans first, which are usually credit cards. Limit your use of credit cards. Instead of using one, pay for future purchases using cash or a check and carry only a small amount of cash. Try meeting with a reliable credit counselor, and after that, consider enrolling in a debt management plan (DMP). Lastly, beware of debt consolidation traps. Make sure you do your research and know what you are getting into.

THE “FOUR C’S” OF CREDIT DECISION-MAKING

In order to borrow money, you need to show lenders that you are able to pay back the money. Lenders take a risk when loaning money, so it’s important to pay your bills on time and develop good habits. If you aren’t paying back the money you owe, that can influence whether or not you are able to borrow money in the future. Remembering the four C’s of credit will help ensure you are in good standing with lenders:

  1. Capacity refers to your present and future ability to make payments. Lenders want to see that you are able to hold a stable job. The longer you’ve been there, the better.
  2. Capital refers to your net worth, or the value of your assets compared to how much debt you have. A positive net worth shows that you are able to effectively manage your money.
  3. Character refers to how you have paid your bills in the past. Here, lenders are looking at your track record of how you have handled debt in the past to indicate if you will be able to do so in the future.
  4. Collateral refers to assets you can offer to secure the loan, such as a house or rental property. This gives the lender peace of mind that if you do default on your loan, they will still get something in return.

CREDIT REPORTS

A credit report is a record of how you have paid your debts. It tells lenders who you are, how much debt you have, if you’ve made payments on time or not and any negative information about you contained in public records. Having a good credit score is crucial. It plays a role in whether you can get a loan or other form of credit, what your interest rate will be, getting a job, renting an apartment or getting insurance. Having a bad credit score can either prevent you from getting these things or require you to have a co-signer who does have a good credit score.

HOW YOUR CREDIT SCORE IS DETERMINED

Credit Score

A credit score is a number that is developed based on information from your credit report. It is used to determine how likely someone is to repay a loan. Credit scores may vary depending on which scoring services are preparing them. A majority of lenders use the FICO credit score, which ranges from 300-850. The FICO score is calculated from several pieces of credit data in a credit report, which are grouped into five categories. Payment history accounts for 35%, amounts owed accounts for 30%, length of credit history accounts for 15%, and new credit and types of credit used both account for 10%. Credit scores consider both positive and negative information. Making late payments or no payments at all will lower your credit score, while making consistent, timely payments will raise it.