Types Of Debt

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Mortgages

The mortgage interest and property taxes may be deductible for federal income tax purposes up to certain limits and the home may increase in value — factors that offset some of the interest charges you must pay. Another smart use of credit is a student loan, which is an investment in your future earning ability.

Home Equity Loans

• With a home equity loan, you borrow a fixed amount in one lump sum and repay it in monthly installments over a set time period, such as 10 years.
  
  
• With a home equity line of credit, a fixed amount of credit is made available to you and you access the credit as needed in amounts up to the limit. You pay interest and principal on the balance due, just as you would with a credit card.
  
  

Home equity loans and lines of credit are appealing because the interest on them is generally deductible for federal income tax purposes and the interest rates are usually lower than those offered with credit cards and other unsecured debt.

The downside of a home equity loan is that you are using the equity in your home as collateral, or the value of your home could decline — eliminating your equity and putting your home at risk. If you cannot make your loan payments, the lender can foreclose on your home.

Vehicle Loans

Credit Cards

• Revolving credit cards, the most common, allow you to charge up to a predetermined limit and either pay the balance in full each month or make payments over time with interest.
  
  
• Pay-as-you-go cards generally assess higher annual fees and require the balance to be paid in full each month.
  
  

When selecting a credit card, compare the annual percentage rate of interest and all fees associated with each card. Choose a card that allows at least 25 days after the monthly closing date (grace period) before imposing finance charges on purchases. With these cards, you avoid all interest charges on purchases if you pay your balance in full by the payment due date.

Signature Loans

Used improperly, credit can lead to financial trouble. It is easy to lose track of how much you are spending when credit is used for vacations, dining out, clothing or gifts. Try to use credit only if you can pay your account balance in full each month.

Your Credit Reputation

• Set a monthly limit for charges.
• Pay bills on time and in full to avoid finance charges.
• Do not skip a payment.
• Limit the number of credit cards you own.
• Know the terms and conditions of your credit card(s) and loan(s). If you have questions, ask for an explanation.
• Keep credit card and loan information in a safe, secure place.
• Keep copies of sales slips and compare charges when your billing statements arrive. Call your company immediately if you find a discrepancy.

By practicing healthy credit habits, you can build a good credit reputation which will result in the following.

• You will have a better chance of being approved for credit when you need a credit card, vehicle loan or mortgage loan.
  
  
• You are more likely to receive higher loan amounts at lower interest rates.
  
  
• You are more likely to get a desirable job, secure an apartment and acquire insurance coverage. Employers, landlords, insurance companies and other businesses review your credit history during the application process.
  
  

Establishing Credit For The First Time

• Maintain active checking and savings accounts with no checks returned for insufficient funds. This demonstrates that you can manage money well and have the discipline to save.
  
  
• Apply for a small, secured loan or credit card from your financial institution, backed by your savings account. Use it carefully and make payments promptly. Paying small credit transactions responsibly establishes your creditworthiness.
  
  
• Secure a credit account from a local store if you cannot qualify for a bank card. Use it in moderation until you have established a good payment record. Then apply for a bank card and stop using the store credit account by formally closing the account with the merchant.