Question

2 pages, how will you ensure you use credit responsibly?

Answer 1

Using Credit Responsibly

Having credit extended to you is not only a powerful spending tool, but it's become a necessity in today's world. It's easy to misuse credit and simple mistakes can end up costing you a lot in the future. Maintaining a good credit rating is not difficult, but there are certain things you must always do to maintain good credit and, ultimately, save a lot of money.

Understanding the Cost of Credit

Credit can be a great financial tool when it is used wisely. Many times people use credit irresponsibly. Credit cards become a problem when we purchase items on impulse, buy things we cannot afford, or live a lifestyle that is way above our current income.

It is important to get in the habit of using credit responsibly. The first step in establishing this habit is to understand the cost of credit. Did you know that if you had a balance of $500.00 on your credit card and only paid the minimum payment every month, it would take you almost seven years to pay it offThe total interest would end up costing you $404.64. That means your $500.00 purchase on your credit card actually cost you $904.64 When you make a purchase on your credit card, an Annual Percentage Rate APR is charged. An APR is the percentage rate calculated on a yearly basis. Some banks have higher APRs than others. Before you apply for a credit card, find out what APR the bank is charging.

Being responsible with your credit mean living without and not spending beyond what you can afford. When you use your credit card, keep an index card in your wallet and write down the purchases you make. That way there will be no surprises when your credit card statement arrives in the mail. You will also be able to keep a handle on what you are spending. Make sure you are charging only what you can afford to pay.

Be cautious of the discounts that many stores offer if you sign up for their credit cards. Have you ever been to a clothing store where the clerk asked if you would like to open up an account and save ten percent on your purchase? Those cards usually carry high interest rates and, in the long run, will cost you more than the ten percent you saved on your initial purchase. If you choose to apply for one of these cards, be sure to inquire about the interest rate and grace period.

Always pay off your credit card balance in full every month. Since you will already know the balance due before you get your statement (because you wrote down your purchases on the index card), put money aside to pay the bill. When you get the credit card statement, pay it on time. By paying off your credit card balance in full and on time, you should be able to avoid interest charges and late fees.

If you are having trouble disciplining yourself to pay off your balance every month, consider getting a card that requires you to pay the full balance every month. Get in the habit of using credit responsibly while you are young and it will help you in your future.

Using credit responsibly can help reach your financial goals, but using it irresponsibly can cause long-term damage.

o How To Establish Good Credit

o Check Your Credit.

o Keep Your Oldest Line of Credit Open.

o Maintain Low Credit Balances.

o Make Payments On Time.

o Pay More Than the Minimum.

o Avoid Big Purchases When You Plan to Buy.

o Build Your Credit From Scratch.

7 Simple Tips to Use Your Credit More Responsibly

o Learn your FICO Score.

o Don't close all of your accounts.

o Do close accounts with high interest rates or fees.

o Use your credit cards periodically for small purchases.

o Use reward cards.

o Don't carry a balance.

o Request a higher credit limit.

If you want to manage credit well and avoid potential problems, it's important to know how your financial behaviors affect your credit and take deliberate steps to build and use credit wisely.

Consider these tips to help you take control of your credit and manage it well.

1. Build credit carefully

You may want to start Build credit by getting a credit card with a low credit limit, such as $500 or less. Make a small purchase with the card each month and pay the bill off each month. This will help you begin building a positive credit score.

2. Pay bills on time, all the time

Your payment history accounts for 35 percent of your credit score, according to fico. That means if you have a history of paying credit card bills on time, that can have a positive impact on your score but if you have a history of missed payments, that can have the opposite effect. If you've always had a history of revolving credit on-time payments,that can help you build a strong credit history.

3. Stay informed of your credit score

Your credit score is based on the information included in your credit report The information in that report is used to assign your credit score. You can request a free copy of your credit report every year without hurting your score from the government-endorsed annuval credit report Make a habit of requesting that report every year and keeping an eye on your credit.

Your credit score which is a number between 300 and 850, shows potential lenders how likely you are to pay back money they lend you. A credit score of 720 or above is generally considered excellent. While your credit score is based on the information in your credit report, it's not usually included in the report. Some credit card issuers also offer a free credit score anytime.

4. Avoid overusing credit

Even if lenders or credit card companies extend credit to you, it's best not to use all of it. In fact, fico recommends keeping your credit utilization rate as low as possible. Most credit experts recommend utilizing no more than 30 %of the credit available to you. So if your credit card limit is $1,000, you may not want to carry a balance of no more than $300.

5. Take action to repair any errors or credit damage

Sometimes credit reports include errors. For instance, a credit card company may report that your balance is unpaid when you've actually paid your bill. Or a criminal could steal your information and open a new credit report in your name, neglecting to pay the bill and lowering your score.

If you find errors in your report, you can get them corrected. But it may take some time and effort. If you believe information on your report is incorrect, contact the credit bureau and the company that was the source of the information. (It's also a great opportunity to check and ensure no one is using your social security number to secure credit under your name. Be sure to include documentation proving your point. Keep following up until they've corrected the errors.

In some cases, your score may be low because of your own actions. Maybe you've missed payments or overused credit, which has led to a lower score. If so, you can improve your credit score, but it will take some effort. Start paying every bill on time and working to pay down debt. Over time, continue to manage your credit responsibly to work towards protecting and improving your score.

How credit cards work

A credit card is a revolving line of credit that allows you to make charges at any time up to the amount of a specific credit limit.

When you swipe your credit card, your bank loans you the money to make that purchase. Unlike a loan, which has a fixed end date and regular monthly payments, with a credit card, you choose how much to repay each month,a minimum payment, a partial payment or your entire balance. With few exceptions, responsible credit card users always pay their balances in full every month.

After you make a purchase with your credit card, the bank gives you a grace period typically between 20 and 30 days,during which you can pay off that purchase before interest begins to accrue.

Grace periods are powerful because they give you the opportunity to use your credit card as a short but interest-free loan. As long as you pay every penny you charged last month before the due date, you won’t pay interest on credit card purchases.

Sooner or later, however, many people do not pay their credit card balance in full each month, turning their credit card into a revolving credit line. Finance charges (interest) then accumulate on the unpaid credit card balance each month.

Best case, a little credit card debt costs a few hundred dollars in interest before you escape. Worst case, you depend more and more on credit cards to keep pace with damage caused by using them in the first place. Failure to make payments makes your credit score plummet. You have trouble getting a car loan or an apartment lease. You might even end up in bankruptcy.

Ultimately, it ends nowhere good.

For all the above reasons, young adults today approach credit cards with extreme caution. In fact, a recent   bank rate made the surprising discovery that only about one-third of millennials take part in what is commonplace for the majority of people in the over-30 crowd.

Yet, equating credit cards with debt can make you miss out on certain benefits. A credit card can be an important financial tool that makes life easier and helps you improve your credit rating — all without costing you a dime.

Of course, sometimes the opposite is true. We all know someone (me) who got into big trouble by using credit cards the wrong way.

How credit card companies make (lots of) money

The credit card companies earn a little bit of money every time you use your card because they charge stores one to three percent of your purchase—called an interchange fee—to accept the card. This is how they can afford to pay back rewards on every $1 you spend—they’re just giving you a rebate of their own fees.

But the banks earn the biggest dollars by charging interest when you carry a balance—in other words, you don’t pay off your purchases in full at the end of the month.

Credit cards typically charge interest rates between 10 and 30 percent. So, with interest at a 15 percent annual percentage rate (APR), if you charge $500 to your card that you don’t pay off for a year, you’ll end up paying the bank $75 in interest. If you owe $5,000 that’s $750 a year in interest. Charge $50,000 and you’ll pay $7,500 a year just in interest!