Learning How Credit Works Puts You in Control

Understand how credit works so you can reach your goals without the risk of added debt.

Become Credit Smart: Achieve Good Credit & Avoid Debt ProblemsMost people never got a class on how to use credit. As a result, we’ve all basically learned by experience, but that leaves room for a lot of trial and error. Unfortunately, when you make errors in this case, it can lead to serious trouble – a bad score, credit card debt, and even bankruptcy. But the good news is that you’ve come to the right place, where you can learn how credit works to develop better habits moving forward.

Note: If you’ve never used credit before, Consolidated Credit offers a free guide to starting your credit history the right way.

First, here’s why credit card debt is such a problem…

Credit cards aren’t the only type of credit, but they are often the biggest source of financial stress and challenges. As a revolving debt, the more you charge, the more you are required to pay. As your balances increase, it becomes harder and harder to maintain a balanced budget. You start juggling bills, putting off things you need, like car repairs and medical procedures.

Higher balances also make it harder to pay off your debt. If you barely have enough money to make minimum payments, it can be extremely difficult to get ahead.  When you find yourself in this situation, traditional monthly payments rarely work to help you get out of debt quickly.

You need to learn to control your debt »

Understanding the cost of using credit

Using credit isn’t free. There are hidden costs involved that can put you behind and hold you back.

Watching out for APR

A big problem with plastic is high annual percentage rates. APR on credit cards is huge compared to other types of credit, like a mortgage or auto loan. Average interest rates currently run between 16-18%. If you only make minimum payments, up to two-thirds of every payment gets eaten up by interest charges.

This table shows you the total interest charges you can expect to pay on a $5,000 credit card balance if you make minimum payments.

APR Total Interest Charges
15% $4,636.99
17% $6,045.56
19% $7,958.04
21% $10,707.60
23% $15,006.98

Credit card fees

Credit card companies, like any other business, need to make money. One of the ways they do this is through a variety of fees. Late fees are common, but you should also keep an eye out for high annual fees, balance transfer fees, and more.

Discover how fees work and how to avoid them »

Why minimum payments don’t work

When you only pay the minimum payment on your credit cards, you are putting yourself at risk for racking up a large amount of debt – or worsening the debt you already have. These payments are not designed to help you pay off what you owe.

Read about how minimum payments really work »

The crushing truth of credit limits

When you get a credit card, the company sets a limit on how much you can charge. This is your credit limit, and depending on how much of it you use, it can have a positive or negative affect on your overall credit score.

Find out how credit limits affect your scores »

Once you take control of debt, you can focus on rebuilding your credit…

Challenges with debt and credit damage tend to go hand in hand. Your credit report may have errors, such as outdated account statuses and expired penalties. And your credit score may have taken a few hits, from things like missed payments, collections or closed accounts. So, once you get a handle on your debt, it’s time to start rebuilding.

Step 1: Repair your credit

Mistakes and errors in your credit report can do serious damage to your score. It’s crucial to review your reports often and dispute any errors you find. This is a process known as credit repair, and it’s something you can do entirely yourself for free. Don’t be fooled into paying a company to dispute mistakes on your behalf. You don’t need another bill when you just overcame a period of financial hardship!

Get detailed instructions on repairing your credit »

Step 2: Rebuild your score

Once you ensure your reports are error-free, you can start rebuilding your score. Negative items in your credit history can lead to bad credit. But the upside is that nothing in credit lasts forever – even bankruptcy and foreclosure. And you can quickly offset mistakes in the past with positive actions now, faster than you think.

The key is to understand how your score works »

Finally, you need to learn better credit management skills

Good credit management is an essential if you want to use credit cards and loans without constantly facing debt problems. The more you know about how credit works, the less likely you are to face financial challenges caused by debt. So, we’ve created a range of resources that can help you learn how use credit without abusing it.

Learn the key differences between revolving and installment credit »

Understand how secured and unsecured credit work »  

Can credit cards play a beneficial role in your financial life?

Once you get out of your immediate debt problems, you have a decision to make. You can decide to stay away from credit cards, which will help you avoid debt problems. But you may also decide to keep credit cards in your life and just develop better strategies so you can control your debt.

When used correctly, credit cards can be a useful tool and a vital part of your financial strategy. They only cause problems when you don’t have a plan in place to manage the debt OR when you use them to cover expenses you can’t afford. Setting some ground rules can help you avoid the financial challenges that credit cards cause.

These resources can help you gain a better understanding of how to use credit and manage credit card debt so you always maintain control over your finances:

Another key aspect of credit management: ID theft prevention

Protecting your personal data top prevent identity theft is a key part of credit management. You want to make sure you’re as protected as possible against credit card fraud, identity theft and even new threats, like social media ID theft. This means using theft prevention tools offered by your financial institution, credit card companies, and the credit bureaus. You also need to know how to handle identity theft efficiently if you become a victim.

Learn how to stop identity theft in its tracks »

Understanding your rights as a credit user

The final piece of good credit management is understanding how your rights as a consumer are protected under federal law. There are key consumer protection rights that help prevent predatory lending and other unfair lending practices, collector harassment and credit abuse. Knowing what these laws say can help ensure that every creditor, collector or financial professional you work with is doing what they should be going to help you.

Get familiar with key consumer protection laws »