Managing Your Credit

Managing Your Credit By Phyllis Naegeli 1 It is important to have good credit in the world today. Many large purchases are made by borrowing money and paying it back over a set period of time.

2 Several factors should be considered before making a purchase. Is this item a need or a want? Is the item important enough to pay the interest necessary to borrow money? Banks and credit cards charge interest on the money you borrow from them. Interest is based on an Annual Percentage Rate (APR). The APR is divided by twelve to compute the monthly finance charge on the principal (balance of money owed). It's a good idea to shop around to find the lowest interest rate available. Another thing to consider is how much you can realistically borrow and repay. Do you have the income to make the payments on the money you will borrow? It is best to keep your debt payments to between ten and twenty percent of your take-home income. This guideline leaves money available for necessary expenses such as transportation, housing, and food. If you find yourself falling in the ten to twenty percent range, it would be sensible to refrain from taking out further credit obligations.

3 In order to obtain credit, you will need a credit history. In a way, this is a "Catch-22" situation. You usually cannot obtain credit without showing how you have managed borrowing money in the past. However, you need to obtain credit in order to build a history. There are a few ways to begin without an available credit history. One way is to establish a savings account at your local bank. Once you have built up a certain amount of money, you can use the account as collateral to obtain a loan. This gives a bank the assurance that you will pay back the loan, because they freeze the money in the savings account. Then, if you do not make the payments on the loan, they can use the money in the account to pay it back. Another way to begin is to have someone co-sign for a loan. More than likely, your parents have built a credit history over the years. If they are willing, they can sign an agreement to guarantee that they will make the payments on your loan if unforeseen circumstances prevent you from making the payments. This assures the bank that repayment will be made on the loan.

4 Once you have obtained credit, it is very important to make your payments on time. Your future ability to obtain credit to make large purchases - such as a car or home - will depend on how well you have managed your credit over the years. Paying late will limit the availability of credit to you.

5 There are different types of credit that are used. The three most common are installment loans, credit cards, and lines of credit.

6 An installment loan is credit given for a specific amount of money. It usually has a fixed monthly finance charge that will be paid back over a set period. The asset you are purchasing - such as a car - usually secures the loan. If you do not make your payments, the asset will be repossessed by the lender.

7 Banks and department stores offer credit cards. When you are issued a credit card, it will normally have a set credit limit available. Department store cards can only be used at the issuing store, while bank credit cards can be used at many different retail outlets. Credit cards usually have low minimum monthly payments with the option to pay the entire balance each month without a penalty. It is best to pay the entire balance each month on these types of cards. If you must carry a balance in order to make a larger purchase, a good "rule of thumb" is to create a budget that will enable you to pay the debt off within six months.

8 Lines of credit are usually offered by banks. When you are approved for a line of credit, the money can be used to purchase goods or to pay down other debt. The monthly payment is based on a percentage of the balance owed plus finance charges. As this type of credit is usually unsecured, interest rates can be higher. In addition, you will need to prove your creditworthiness to receive this type of a loan. Access to this credit is done by checks issued by the bank or through direct deposit into a checking account.

9 Credit cards and lines of credit are referred to as revolving credit. As you pay down the debt, the money is available again for your use.

10 Once you have credit cards, you need to protect yourself from theft and fraud. You should keep track of your credit cards by making a list of them. Write down account numbers, addresses, and contact phone numbers for each card and store the list in a safe place. If a card is lost or stolen, this information will be vital for contacting the issuer of the card. It is also important to check your statement each month for accuracy. Keep your receipts for purchases and check to see that only authorized charges are on your account. Credit card fraud is a large problem today. Most credit card issuers have programs to protect you; however, it is your responsibility to follow the rules for reporting errors or fraud.

11 In today's world, having good credit is a tremendous asset. When it comes time for you to obtain a job, purchase a home, or make other large purchases, your credit record will be checked. Having a clean record will enable you to pay lower interest rates and obtain the credit you will need.

Name Date ______Managing Your Credit 1. Which of the following questions 2. Which of the following offer credit should you ask before making a cards? (Choose all that apply) purchase on credit? (Choose all that Parents apply) Teachers Did I get the job? Banks Do I have the money to make Retail stores payments? All of the above Is this item something I need or something I want? Will my parents pay back the loan if I don't? 3. If you find you must make a larger 4. To what percentage of your take- purchase using a credit card, what is home income should your debt the "rule of thumb" for paying off the payments be limited? debt? 10% to 20% Pay off the debt whenever you Whatever is left over after all other can payments are made. Pay off the debt within six years 25% to 50% Pay off the debt within six months 15% to 25% Take out a line of credit to pay the debt 5. Which types of credit are referred to 6. How can you protect yourself from as "revolving credit"? (Choose all credit card fraud? (choose all that that apply) apply) Mortgages Have lots of credit cards Installment loans Keep track of cards by making a Department store credit cards list of important information about Lines of credit the cards Keep them in your wallet but never use them Check your statement each month by using receipts for purchases you have made 7. What is APR? 8. It is a good idea to pay off your Annual Percentage Rate credit cards each month in full. Annuity Performance Rate False Annual Performance Rate True Annual Percentage Ratio

Managing Your Credit - Answer Key Answers:

1 b,c 2 c,d 3 Pay off the debt within six months 4 10% to 20% 5 c,d 6 b,d 7 Annual Percentage Rate 8 True