The Credit Handbook

The ABCs of Credit

Credit offers convenience. And, in today’s economy, using consumer credit has become a major element of personal money management. Credit allows you to buy and use items now, but pay for them later. With credit, you can enjoy a purchase while you’re paying for it—or you can make a purchase when you lack ready cash. There is usually a charge to borrow money, however. And, money borrowed is money that must be paid back. You can gain a lot from using credit. You can also lose a lot if you don’t handle credit well.

Where Do I Start?

If you don’t have a credit history, your first step will be to start building one. Consider applying for a local store’s charge card or a small loan at a local lending institution. Although most institutions that offer credit (called “creditors”) report their accounts to the credit reporting agencies (companies that keep track of a person’s credit history), be sure to ask before opening an account.  If the creditor does report to the reporting agencies and you pay back your debts on time, you will begin building a good credit history. Be sure to consider how much the card or loan will cost you and look out for hidden fees.

If you are applying for a loan or credit card from a local bank, you may want to sit down with a banker. The banker may know you personally and can better judge your individual situation. Of course, this is less feasible for most people today, since computers have taken over much of the guesswork involved in granting credit.

Choices! Choices!

There are three basic types of credit available. These are:

1. Revolving Credit:
Most credit cards are revolving credit accounts. You have a credit limit or “line,” (the total amount you can borrow or owe at one time) and your monthly payments are based on how much credit you’ve used at any time. Most revolving credit is unsecured.

2. Open 30-day Agreements:
Charge cards require you to pay off your balance at the end of each month (or 30-day agreement period). Your balance depends on your ability to pay and your past usage. Interest is only charged on late payments. If you make too many late payments, you may lose the card.

3. Installment Loans:
Mortgage, car, furniture, and personal loans are types of installment loans. You borrow a fixed amount of money and are given a period of time to pay it back, usually in equal monthly payments. Most installment loans are secured by the property you are purchasing.

Credit Cards

Many of us enter into our first consumer credit transaction when we open a credit card account. Below is a list of some of the advantages and disadvantages of using credit cards.

The Case for Credit Cards

Today it’s hard to live without credit. Reasons people use credit cards include:

1. It’s a safety net.
Having a credit card helps many of us pay expenses in case of an emergency.

2. It’s flexible.
Credit cards may be used almost everywhere in the world, and are often more accepted than a personal check, or even cash.

3. It offers protections against theft.
If a card is lost or stolen, federal law limits how much you will owe if it is stolen and used by the thief.

4. It’s leverage.
Chargeback protections are helpful if you are not successful in resolving a complaint about faulty merchandise or poor service. You may be able to tell your credit card issuer that you refuse to pay for a service or product that did not arrive or disappointed you.

5. It’s the way of the world.
Credit cards guarantee reservations for hotels and rental cars, and let you purchase items by phone or online.

6. It’s convenient.
It’s easier to carry one or two credit cards than a lot of cash. This is especially true when traveling.

7. It can help with money management.
You can use your monthly credit card statements to help you budget and track expenses.

8. It can help you get more credit.
Before granting you more credit, credit issuers like to see that you have managed money well in the past. If you have, and your credit report shows it, a creditor is more likely to give you a loan or a new credit card.

There Are Disadvantages, Too

So, what’s not to like? Credit looks easy! Charge it now, pay for it later—and just make one easy payment at the end of the month. But there can be drawbacks to using credit. Some credit card users find they’ve spent too much money on too many things. Some can’t pay all their credit card bills—or can’t pay their bills on time. And, those who have trouble paying back their debts may find they can’t borrow money when they want to make a really important purchase—like a house or car. Other disadvantages to using credit cards include:

1. It almost always costs money.
If you don’t pay off your total balance every month, you will be charged interest that can add up quickly.  Credit card issuers sometimes also charge many different fees.

2. It can seem too easy.
Credit cards may encourage you to overspend.

3. It rewards the impulse for instant gratification.
Credit cards may discourage you from comparison shopping or bargain hunting, or delaying a purchase until your finances improve.

4. It can ruin your credit score.
Overuse and a bad repayment record can hurt your ability to get credit in the future.

5. It ties up your future income.
If you have debts to repay, today’s income is paying for yesterday’s bills.

So, after weighing the advantages and disadvantages to using credit cards, most of us will still choose to keep one or two around. But which credit card is the best? And how do you know what credit is really costing you? Stay tuned. We will explore these issues in the next two chapters.