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WHAT IS CREDIT?
As much as we wish credit was ‘free’ money, credit is actually borrowed money that you have to pay back. Not only do you have to pay for the purchases you make using credit, but also the fees and interest that the credit card company (or lender) charges for you to use credit. Credit is generally defined as a contract agreement in which a borrower receives a sum of money or something of value and repays the lender at a later date, generally with interest.
WHY IS IT IMPORTANT TO KNOW ABOUT CREDIT?
It’s important to recognize the pros and cons of using credit so that you can make good decisions about when and how to use it. When managed responsibly it can be an incredibly valuable asset. Using credit wisely will help you build a good credit history, which is important in helping build your long-term assets, such as owning a car, house, or business.
KEY ADVANTAGES OF USING CREDIT:
— A credit card can build your credit rating. Your credit score benefits from your record of on-time payments, as well as having available credit that you aren’t using (which improves your credit utilization). A favorable credit score increases your chances of approval for other products such as car loans or a mortgage, and can impact the amount of interest charged on such loans.
— Reduces opportunities for financial fraud. If you use your debit card and someone steals your card number at a gas station, restaurant or online, the cybercriminal has access to drain all of the cash from your checking account. Your fraud liability on credit cards is more strictly limited than debit. Most credit cards come with $0 liability for fraudulent transactions and provide more options for fraud protection.
— Some of the best credit cards give you automatic insurance on every purchase. Rather than paying for expensive purchase coverage from the retailer, you can rely on purchase protection, extended warranty coverage, price change protection and other benefits offered by some credit cards.
— Credit cards offer flexibility. Credit cards allow the customer to avoid having to carry large amounts of cash around. They are perfect for those occasions when an unexpected purchase becomes necessary, and sufficient cash is unavailable.
— Credit cards work in any currency. Although currency conversion fees usually apply, you can use your credit card overseas to make purchases in a foreign currency.
— A good credit record is an indicator of fiscal responsibility. Many employers and landlords review your credit record before offering employment or signing a lease agreement.
KEY DISADVANTAGES OF USING CREDIT:
— If you carry a balance from month-to-month, you’ll pay interest charges. This means that you can end up paying significantly more for purchases than if you pay in cash.
— Having too many credit cards or carrying a high balance can negatively affect your credit score.
— Credit cards create the illusion of free money and this leads to the temptation to overspend.
— Unless a strict budget is followed, monthly payments may be more than you can afford.
— Future income is committed, so you’ll have fewer dollars to spend until the debt is repaid.
— Missed credit card payments and ongoing debts are recorded on your credit record and can impact your chances of getting future loans.
TEST YOUR CREDIT SMARTS:
Take this quiz to see what you’ve learned.
ARE YOU READY FOR CREDIT?
Did you know that Young Americans Bank offers credit cards? With a starting limit of just $100, these are a great way to start building credit and practicing using credit responsibly. Doing these will help increase your credit score, so by the time you’re ready to take out a loan for a large purchase–say a car or a home–you’ll be able to qualify for a lower interest rate. Talk to a Financial Services Representative on your next visit or give us a call at 303-321-2265 to see if you’re ready for credit!
