Payday Loans

Understanding Credit

Personal Finance

Family Finance

Understanding Personal Credit

In this day of putting everything on plastic, most people have forgotten the basic principles regarding personal credit.

* Credit is not a substitute for cash.

* Credit is is a privilege

* Credit has strings attached for its use.

* Credit needs to be used wisely.

* Credit cards deserve respect.

* Credit cards are not collectibles.

* Credit card closure.

* Credit reports affect more than just credit cards.

By keeping these principles in mind, good credit can be established and maintained.

Credit is Not a Substitute for Cash:

Credit is not a substitute for cash; it is a loan. The lender is giving the consumer to ability to purchase something today with the promise to pay tomorrow. Lenders need to trust that the individual is able and willing to repay the money borrowed, as well as any interest that may accrue on the outstanding balance.

Credit is a Privilege:

In order to establish credit with a lender or financial institution, a consumer must first submit an application. The lender will then use a number of factors to determine the consumer's ability to repay the loan. Lenders use credit reports to predict the consumer's financial trustworthiness. The credit history contained in the report reveals a lot about the consumer's spending and repayment habits. Other factors that influence the decision to extend credit may include employment and salary information, especially when the consumer has a limited credit history.

Credit has Strings Attached:

Once the consumer has been approved, the lender provides terms for the use of the credit. Terms include information about billing cycles, late payment penalties, and interest rates on outstanding balances. Additionally, the lender also sets the maximum amount of credit, or credit limit, available to that consumer, and any penalties should the limit be exceeded.

Credit Needs to be used Wisely:

Creditors and lenders report on their consumers through credit reporting bureaus. Any action a consumer takes on a line of credit, a report is made to the credit reporting bureaus and is reflected in the consumer's credit history. However, the consumer is not powerless over the information contained in a credit report. Federal laws provide consumers the ability to review their own credit reports for free and to challenge incorrect information that may have been included in the report. Also, if a consumer has been denied credit due to a bad credit report, the consumer has the right to know.

Credit Cards deserve Respect:

In order to keep a good credit report, personal lines of credit (credit cards) need to be used with respect and the bills paid diligently. The best way to use credit cards is by charging only what you can afford to pay, using the smallest portion of the available credit line possible, and paying off the bill in full and on time every month. However, debt does happen. In those situations, it is best to stop using all credit cards until the existing balance is paid off. Where possible, pay more than the minimum monthly balance to avoid paying interest fees that greatly inflate the cost of the items purchased.

Credit Cards are not Collectibles:

It is possible to have too many credit cards. Too many open lines of credit actually lower a consumer's credit score, and if there are too many monthly bills, it is easy to get behind on payments.

Credit Card Closure:

Once the decision is made to close credit cards, it should always be done in writing. Be careful about which cards to close. As a general rule, do not close the oldest credit cards, any credit cards with a balance, or any credit cards with a good interest rate. It is generally recommended that store lines of credit should be closed first.

Credit Reports Affect More than just Credit Cards:

Credit reports are also used to make other decisions about a consumer. For example, credit reports are used by potential landlords, utility companies, mortgage companies, and auto finance companies. The credit score is used to set loan amounts and interest rates. Employers will also use credit reports when evaluating a potential employee.

Understanding Credit Links