Understanding Credit and Credit Cards

Good credit is required for most things now days. From buying a car, taking out a mortgage, even to qualify for a rental. You can’t escape the need for credit. Credit is built over time as you begin to show reliability in borrowing and repaying debt. Starting when you are young is helpful but most often people don’t know where to begin. Whether you are just starting out, trying to rebuild, or want some help teaching your kids about credit, you’ve come to the right place.

To begin, what even is credit?

It is borrowed money that you can use to purchase goods and services when you need them. It is not “your money”. It is money that must be repaid, usually with interest.

Do you really need credit? The short answer is, yes. Not just credit, but good credit is necessary if you plan to make any major purchases in your lifetime. Landlords, even employers can check your credit to determine your reliability as a tenant or employee.

Common Terms

Interest– the cost of borrowing money from another person or entity

Debt– amount owed to another person or entity

Billing Cycle– a period of time between the last billing date and the current billing date

Interest Rate– the rate of interest charged on the outstanding principle of a loan

Minimum Amount Due– the minimum amount you MUST pay to stay current on your debt repayment. This amount can change based on the balance owed.

Annual Percentage Rate– the total cost you pay each year

Payoff Amount– amount you will pay to clear your debt today. This could differ from your current balance and can include an early repayment fee. 

Down Payment– Typically viewed as a percentage of the purchase price that you put down up front. 

Principal Balance– the original amount borrowed from the lender

Balance Transfer– a transfer of debt from one institution to another. Typically done with credit card balances. 

Refinance– To change the terms of your loan. Typically done when interest rates decrease. You must apply for this to happen. It is not done automatically.

Collateral– something of value that the lender can use to ensure they will get their money back. 

Cosigner– someone who agrees to repay the loan if you don’t. Essentially human collateral. Be cautious about co-signing and only do so if you are financially stable enough and fully trust the person you are backing. 

 What are the advantages to using credit for purchases?

  •  Ability to buy needed items now
  • Don’t have to carry cash
  •  Creates a record of purchases.
  •  More convenient and more accepted than writing checks
  •  Consolidates ‘bills’ into one payment
  • Builds Credit

 What are the disadvantages to using credit for purchases?

  •  Charged Interest (a percent of the debt that must also be repaid)
  •  May require additional fees
  • Financial difficulties may arise if one loses track of how much has been spent each month
  •  Increased impulse buying may occur causing unnecessary debt

Since we know building credit is necessary, what are some ways you can build credit responsibly?  If you have a steady income and consistently spend less than you earn, you could consider ways to build credit. 

1) Apply for a credit card

         TIP! Only use the credit card for purchases you would make anyways. Pay it off in full each month. Never exceed a balance more than 40% of the cards limit. Consistently staying above that ratio can actually hurt your credit.

         What if you can’t qualify for a traditional credit card? Try applying for an introductory credit card or spend several months growing service credit (see below).

2) Service Credit

         Such as electricity, cellphone, gym membership, etc. Making timely payments to your bills helps build your credit.

3) Installment Credit

         Installment payments made for a predetermined amount for a set amount of time. Commonly used for Home Mortgages and Car Loans.

I love to travel. It is something that brings me tremendous joy and keeps me going during the year. I would not be able to travel as regularly as I do without the miles I earn through my credit card. When selecting a credit care to use, consider what is meaningful to you. Some credit cards offer cash back on daily purchases, others offer discounts for commonly used products, some offer travel points for airlines, hotels, rental cars, etc. Do your research and find the card that fits your needs and has an acceptable interest rate. The interest you will be charged is often determined by your credit score. Typically credit cards interest rates range between 10-20%. However, if you pay your card off in full each month, interest does not accrue.

I hope you were able to pick up some helpful information for yourself or to share with others. The financial world can be overwhelming to so many. My hope is to simplify the information in a way that makes it accessible to many.



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