Using Credit Wisely

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Credit is an important tool.

• It allows you to purchase items you could not afford with cash, such as a college education, new vehicle, furniture or home.
  
  
• It helps you build a credit reputation which is summarized in a report that future lenders, employers and other businesses use to make decisions about your creditworthiness.

Credit is a privilege and a serious responsibility. Unfortunately, it is easy to misuse. Some individuals view credit as a license to spend money they cannot repay. Poor spending decisions can leave them deeply in debt and damage their credit reputation for years ahead.

Practice Healthy Credit Habits

• Set a monthly limit for charges and stick to it.
  
  
• Pay bills on time and in full to avoid monthly 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 the company 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 there is a discrepancy.
  
  

Read The Fine Print

Applying payments: Is there more than one interest rate on the account? How are the payments applied toward the balance owed?

Spending limits and credit lines: Is there a spending limit? How much is my credit line? Can I increase, reduce or cancel the credit line at any time?

Default rates: Will you change the rate on my credit card if I make a late payment to you or other creditors?

Fees: What fees will you charge — annual fee, a late payment fee, fee for insufficient funds or unsigned checks, fee for a copy of my statement and payment by phone?

Disputes: What rights do I have in resolving disputes about my credit card account?

Grace period: What is the grace period for paying the balance due on my account? Is the grace period shorter than 25 days?

Authorizing charges: For what reasons would you reject my use of this credit card?

Terms of agreement: When do the terms of agreement change and how will I be notified of changes?

Remember, when you purchase something with a credit card, you take out a loan. With your signature, you enter a contract to repay the loan in full.

Compare Credit Carefully

Compare options carefully.

• Annual percentage rate (APR) — the rate of interest (expressed as a percentage) charged for a loan over a year’s time. The APR includes interest, transaction fees and service fees.
  
  
• Fees charged by the card issuer — these may include over-limit fees, annual fees or cash advance fees.
  
  
• Grace period — the amount of time you have to pay before interest is charged.
  
  
• Other benefits — these may include frequent flyer miles or access to an automated teller machine (ATM).
  
  

The Four Cs Of Credit

1. Capacity: Your ability to repay credit.
2. Collateral: Your personal property, such as a bank account or vehicle, that provides the creditor with security if you cannot repay your debt.
3. Character: Your ability to use credit responsibly.
4. Creditworthiness: Your credit history (how you have managed money in the past).

Your Credit Reputation

• You 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.
  
  

The following steps can help you build a good credit reputation.

• 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.
  
  
• Limit your debt. Financial planning professionals recommend keeping your personal debt-to-income ratio at or below 20 percent, excluding mortgage or rent.
  
  

Use the Debt Danger Signals checklist to help you determine if you are managing debt appropriately.

Getting Out Of Debt

• Pay more than the minimum payment due on your credit card balances. It will help reduce the length of the loans and interest costs you must pay. Continue until all balances are zero.
  
  
• Close all high-interest credit card accounts except the one with the lowest interest rate. You may want to consolidate credit card balances to your lowest interest rate credit card. Use it for emergencies only.
  
  
• Use a debit card instead of a credit card. Because the money is taken directly out of your checking account, you are spending money you have, not increasing your debt.
  
  
• Pay bills on time to avoid costly late fees and high interest charges.
  
  
• Take advantage of free and low-cost credit advice from sources such as the National Foundation for Credit Counseling (NFCC). This nonprofit organization can provide you with advice concerning budget planning. Contact NFCC at (800) 388-2227 or www.nfcc.org.
  
  
• Avoid payday loans.