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Credit
Credit History
Credit Insurance
Credit - What is it?
Credit does not refer only to a credit card. The term credit is used to
describe an individual's financial dependability. How trusting a creditor
is toward you depends on your credit worthiness. Your worthiness for
access to any creditor's money or goods is based on your history of
employment, timely payments on debt, and salary. If you are considered a
trusted candidate for credit, you will be able to borrow money more easily
and at a lower rate than someone with poor credit. Those without good
credit can find it difficult to access funds, whether they be for a car
loan, mortgage, housing, or even employment.
Your trustworthiness for credit is assessed by creditors using a
credit
score. Your credit score is kept on your credit report.
Young people just starting out typically have no credit score. This is why
it is so important for a young person to understand credit before
accessing it. The decisions and choices they make about credit can affect
them for the rest of their lives.
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How to Establish Good Credit
Young people often have difficulty accessing credit, as creditors find it
difficult to assess their financial dependability. Credit scores are based
on factors such as annual income, bill payment history, and outstanding
debt - often variables that young people have not yet encountered. There
are a few ways to begin building good credit, including applying for a
secured credit card, which requires you to pay the money planned to be
borrowed up front. Other methods include having a co-signer, who agrees to
pay debts on behalf of the other person if that person does not pay. As
well, applying for a credit card at many local stores is often easier than
applying for major credit cards such as Visa or Mastercard. Once a pattern
of timely payments is established, major banks and lending institutions
will be more willing to issue you credit.
Other factors also affect your credit score. Young people need to always
pay rent and utility bills on time, as these will positively impact a
credit score.
Critical to establishing good credit is understanding some important
concepts about credit. Some of these are outlined below.
Credit cards - Charge Cards - Debit Cards
These are three different things.
A credit card allows you to make purchases and pay for them over time.
Understand that credit cards are literally loans - they must be paid back,
and if not paid back within a certain time period, will incur interest
costs. These interest costs are typically very high.
Charge cards are different than credit cards, as they cannot be paid back
over time. Once a bill is received from purchases made on a charge card,
the sum must be paid back in full immediately.
Debit cards simply allow a person to make purchases with the money that is
already in their bank accounts.
Concepts important in understanding credit cards and many other types of
credit include:
Annual percentage rate (APR) - We've all heard this term when viewing TV
adds for cars and other types of merchandise. APR refers to the yearly
interest rate, and is used as a measure of the cost of credit. Typically,
a lower APR is better, but don't be fooled by a low APR with a short time
limit. If the time limit is very restricted, often your APR skyrockets
after than initial period., expressed as a yearly interest rate. Usually,
the lower the APR,
the better for you. Be sure to check the fine print to see if your offer
has a time limit. Your APR could be much higher after the initial limited
offer.
Annual Fee - Some credit cards incur annual fees, typically between
$10-$100.
Grace Period - Credit cards enable you to make purchases without having to
pay any interest for a particular length of time, typically 30 days. This
is called the grace period.
Transaction Fees - It often costs money to perform certain transactions.
With credit cards, examples include a fee charged for cash advances, or
fees charged when spending over the designated credit limit.
Customer Service - This refers to the type and times of contact you may
have with the creditor. Important issues to consider include whether the
creditor provides you with a toll free contact number and if the creditor
available 7 days a week, 24 hours a day.
Before making a decision to take out credit, talk to someone close to you
about your decision. This person could be a family member, a banker, or
any person who is knowledgeable about the risks and benefits of obtaining
credit.
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