Part 5 helps you understand credit and credit use

Credit is your ability to borrow money. Anytime a bank, finance company, or business lends you money and you agree to pay it back at a later date, you are using credit. In most cases, there is a charge for borrowing the money, either in the form of fees or interest or both. There are both advantages and disadvantages to using credit.

Advantages of using credit:

Disadvantages of using credit:

Credit Affects Your Ability to Borrow Wisely

Your credit is one of the factors that will determine what interest rate you will qualify for with most lenders. In general a higher credit score rating will mean greater access to lower interest rate loans.

Protect Your Interest!

Whether you are shopping for mortgage loans to buy a home or considering refinancing or a home equity loan on your existing home, you need to protect your interest. When shopping for a loan, make sure to find the product with the lowest interest rate and most favorable terms.

Interest Rate Comparison Chart

The following compares loans at different interest rates for a $175,000 loan, with a 30-year Fixed-Interest Rate Mortgage Loan.

Rate Payment
5.75% $1536
7.25% $1194
10% $1536

A higher credit score rating will help you get the lower interest rate loan and save $515 a month or $185,220 over the life of your loan!

Establishing Credit

You may not have a credit rating, simply because not enough information is available about you. It is important to meet with a Housing Counselor to see what you should do to establish credit to purchase a home. Here are some general ideas for building a credit history over time:

  1. Start by opening a checking account and do not overdraw it.
  2. Make regular deposits into a savings account.
  3. Once you have a relationship with a bank, you can apply for a checking or savings account line of credit to establish a line of credit. You can deposit money from the line of credit into a savings account while making payments on the line of credit. This way you will build savings at the same time you are establishing credit. Ask your bank about a secured line if credit.
  4. Make sure your rent, untilities, and other bills are in your name and that you pay them on time each month as it may be possible for a lender to use your bill paying history as alternative credit to help you buy a home.

Credit Cards: What You Need to Know

Studies have shown that people generally keep their first credit card for 15 years. That’s why creditors target young people as potential customers; the relationship lasts so long because younger consumers frequently don’t know how to find better deals.

Some people claim that credit card companies aggressively recruit students in an effort to get them “hooked” on credit by luring them with t-shirts and other freebies when they apply for cards. This course is designed to give you the facts you need to become a wise consumer and the tools you need to use credit wisely.

Don’t let yourself be lured by the offers. A credit card is not an invitation to spend money you don’t have. Let’s say you run up $500 on a credit card that charges 15% interest and requires a 2% minimum payment each month. Even if you never charge another item and pay the minimum on your account, it will take 6 1/2 years to repay your debt. When you have finally paid your debt, you will have paid nearly $300 in interest on your $500 purchase, making your total cost $800.

You’ll pay even more if you make late payments or go over your credit limit. Always pay on time, even if you just pay the minimum due. Late fees have skyrocketed; it’s not uncommon to find a $30 late charge applied to your account for a payment that’s only one day late. Credit card issuers also may increase your interest rate if you’re 60 days overdue.

Your credit report affects more than you ability to get a credit card or a loan; it can also affect your ability to get a job or get into college. Many employers and colleges review credit reports to judge an applicant’s character. Late payments, over-the-limit charges and heavy debt can affect you adversely. Hopefully, the tools you gain from this course will help you avoid future credit problems.

Pros & Cons of Using Credit

Advantages:

Disadvantages:

Types & Sources of Credit

Single-payment credit
This is when items and services paid for in one payment, within a stated time period. Interest is usually not charged. Examples:

Installment Credit
This is when merchandise and services are paid for in two or more regularly scheduled payments of a set amount. The interest is included. Money may also be loaned for a special purpose, with the consumer agreeing to repay the debt in two or more regularly scheduled payments. Examples:

Revolving Credit
Many goods and services can be bought using revolving credit as long as the total amount does not go over the consumer credit limit. Repayment is made at regular time intervals for any amount at or above the minimum required amount. Interest is charged on the remaining balance. Examples:

How Much Credit Can You Afford

Never borrow more than 15% of your yearly income.

Example:
If you earn $500 a month after taxes, your yearly net income is 12 x $500=$6,000
Calculate 15% of your annual net income to find your debt load. $6,000 x 15% = $900
So, you should never have more than $900 of debt outstanding.

Note: Housing debt (mortgage payments) should not be counted as part of the 15%.

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

Example:
If your take home pay is $500 a month: $500 x 10% = $50.
Your total monthly debt payments shouldn’t total more than $50 per month.

Comparing Credit Cards

Cost of Credit:

One card issuer could offer you a 5.99% rate while another could offer you a 21% rate. The difference in what items will end up costing can be astounding.

Credit Card Features:

Before You Sign Up for a Card:

Continue learning about credit

"We are really proud to recommend Consolidated Credit" Kathleen Cannon, President & CEO of United Way of Broward County. Consolidated Credit Counseling Services, Inc. is pleased to announce our partnership with the United Way as a United Way Chairman’s Circle Organization.

"We are really proud to recommend Consolidated Credit" Kathleen Cannon, President & CEO of United Way of Broward County. Consolidated Credit Counseling Services, Inc. is pleased to announce our partnership with the United Way as a United Way Chairman’s Circle Organization.

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