The Advantages, Disadvantages and How to Use Credit Responsibly

In today’s world, credit is integrated into everyday life. From renting a car to reserving an airline ticket or hotel room, credit cards have become a necessary convenience. Using credit wisely is the challenge.

Able to buy needed items now Don’t have to carry cash Creates a record of purchases More convenient than writing checks Consolidates bills into one payment

Interest (higher cost of items) May require additional fees Financial difficulties may arise if one loses

track of how much has been spent each month

Increase in impulse buying may occur

Credit may be necessary, but first you have to get it. Credit unions or banks will need to take a look at who you are before they will issue you any type of credit.

CharacterCapitalCapacity

From your credit history, does it look like you possess the honesty and reliability to pay credit debts?◦ Have you used credit before?◦ Do you pay your bills on time?◦ Do you have a good credit report?◦ Can you provide character references?◦ How long have you lived at your present address?◦ How long have you been at your present job?

Do you have any valuable assets such as real estate, savings, or investments that could be used to repay credit debts if income is unavailable?◦ What property do you own that can secure the

loan?◦ Do you have a savings account?◦ Do you have investments to use as collateral?

Have you been working regularly in an occupation that is likely to provide enough income to support your credit use?◦ Do you have a steady job? What is your salary?◦ How many other loan payments do you have?◦ What are your current living expenses? What are

your current debts?◦ How many dependents do you have?

Borrow only what you can repay Read and understand the credit contract Pay debts promptly Notify creditor if you cannot meet payments Report lost or stolen credit cards promptly Never give your card number over the phone

unless you initiated the call or are certain of the caller’s identity

Monitor your credit report yearly to ensure that your history is represented accurately and that no one has committed identity theft against you

In order to receive credit, first you will need to build a credit history. Without a history, receiving credit will be difficult.

Establish a steady work history

Pay all bills on time Open a checking

account; record transactions, and don’t bounce checks

Open a savings account; make regular deposits

Apply for a low balance credit card; make regular payments to get into the habit

Apply for a small loan using your savings account as collateral

Get a co-signer for a loan and pay back the loan as agreed

All of your credit history can be found in one place: your credit report.

Pictured above is one section of a sample credit report. Section A shows your personal information (name, address, employer, etc.); Section B shows any personal comments you have sent to the credit bureaus for inclusion in the

report; and Section C shows a summary of your payment history.

Section D, The Account History Information section, includes detailed information about all credit accounts in your name. Accounts are divided into

five categories—Real Estate, Revolving, Installment, Other, and Collection. Also included in this section are a two-year and seven-year payment history.

Section E above illustrates any public record information available about legal matters affecting your credit. These public records may include

judgments against you in civil action, state or federal tax liens, and/or bankruptcies. Section F lists details about each inquiry that has been made into your credit history by a creditor or potential creditor. Section G lists the

names of all creditors and potential creditors that appear on your credit report.

Another important aspect of your credit history is your credit or FICO score.

A credit score is a number that summarizes your credit risk based on a snapshot of your credit report at a particular point in time. A credit score helps lenders evaluate your

credit report and estimate your credit risk. The most widely used credit scores are FICO scores, the credit scores

created by the Fair Issac Corporation.

FICO scores have a 300-850 score range. The higher the score, the lower the risk to the creditor. But no score says whether a specific

individual will be a “good” or “bad” customer. Each lender uses its own strategy, including the level of risk it finds acceptable for a given credit

product.

These percentages represent the importance of each of the five categories for the general population. For particular groups—for

example, people who have not been using credit long—the relative importance of these categories may be different.

It is important to monitor both your credit report and credit score.

Each year you are entitled to one free credit report. www.annualcreditreport.com will provide you with each bureau’s report free of charge annually.

Checking your credit score often costs a fee. However, sites like www.creditkarma.com offer one credit score for free, which will give you an idea of your overall score. Another benefit of this site is its ability to track your score each month and chart its changes.

• Single-Payment Credit• Installment Credit • Revolving Credit

Items and services are paid for in a single payment, within a given time period, after the purchase. Interest is usually not charged.◦ Utility companies, medical services◦ Some retail businesses

Merchandise and services are paid for in two or more regularly scheduled payments of a set amount. Interest is included.◦ Some retail businesses, such as car and appliance

dealers Money may also be loaned for a special purpose,

with the consumer agreeing to repay debt in two or more regularly schedule payments.◦ Commercial banks◦ Consumer finance companies◦ Savings and loans◦ Credit unions

Many items can be bought using this plan as long as the total amount does not go over the credit limit. Repayment is made at regular time intervals for any amount at or above the minimum required amount (usually a percentage of the money owed). Interest is charged on the balance.◦ Retail stores◦ Financial institutions that issue credit cards

The 20-10 rule is good to keep in mind when deciding to borrow money. Never borrow more than 20% of your yearly net income. Monthly payments shouldn’t exceed 10% of your monthly net income.

Never borrow more than 20% of yearly net income.

Monthly payments shouldn’t exceed 10% of monthly net income.

If you earn $400 a month after taxes, then your net income in one year is: 12 x $400 = $4,800

Calculate 20% of your annual net income to find your safe debt load: $4,800 x 20% = $960

So you should never have more than $960 of debt outstanding.

If your take-home pay is $400 per month: $400 x 10% = $40

Your total monthly debt payments shouldn’t total more than $40 per month.

Note: Housing payments (i.e., mortgage payments) should not be counted as part of either calculation, but other debts should be included, such as car loans, student loans, and credit cards.

You followed all the tips and were still denied credit? Why?

The most common reasons people are turned down when they apply for credit are:

◦ Too little time at current job or at current residence◦ Too much existing outstanding debt◦ Unreasonable purpose for requesting credit◦ Cosigner cannot take on additional debt liability◦ Errors on credit report◦ Strict creditor standards

If you are denied credit, the creditor must provide you with a written statement of the action and your rights, as well as the reason for denial or how to request the reason.

◦ Face up to the problem. Recognize that you are overextended, and contact your creditors to see if they will set up a new payment schedule that you can maintain.

◦ Immediately stop purchasing with credit. Take your credit cards out of your wallet. Store them in a spot that is hard to reach, or even cut them up.

◦ Consider consolidating debts. You may find it easier to make a single payment rather than several. You might also get a lower interest rate that will make it easier to keep up with payments.

◦ Contact a credit counseling organization. You can obtain referrals for organizations in your area through the National Foundation for Consumer Credit (800.388.2227).

◦ Don’t expect miracles. Don’t believe companies that promise to fix a poor credit rating quickly and painlessly for a fee. As long as it is accurate and timely, negative information cannot be removed from your credit record. The only way to improve a credit record is to let time pass and establish a record of on-time payment.

You have to learn to control spending to avoid future debt.