Intro to Credit

While money still doesn’t grow on trees, there are many tools and resources available to help us manage our finances and also help build our national and global economy. Credit is a tool that has proven to be a great asset for many when used properly and a great liability when used incorrectly. Learning how credit works early on can help you make smart financial choices in many aspects of your life.

What is credit? How can I use it?

Credit is the act of borrowing or having money advanced at the price of an assigned interest rate. Credit is a demonstration of trust by a bank or lender that allows you to buy something now and pay for it later. By using credit, you are making a promise that you will pay back the initial balance borrowed within a specified period of time or pay interest on the amount used for the purchase. Credit is something that is not available to everyone. The right to credit must be earned by meeting requirements set by the bank or lender. Most companies that offer forms of credit often evaluate similar criteria or characteristics to help them decide if you are worthy of credit. These criteria are known as the Three C’s of Credit:

• Capacity: A lender’s ability to confirm that you can repay the amount of the original loan plus the interest on the loan.
• Character: Your moral or ethical standing. Character is often evaluated by a lender to confirm whether or not you are someone the bank can trust and should do business with.
• Collateral: A borrower’s personal property, something of a monetary value, pledged to a lender as a source of repayment should the borrower not be able to pay back the loan.

There are several different types of credit available to meet various needs. There are types of credit available to help you make large purchases such as a car or home improvements, or smaller forms of credit to help you pay for smaller expenses like text books or a weekend getaway. Despite which form of credit you use, keep these simple rules in mind to use the credit form you apply for successfully.

Rules of Thumb to Manage Credit Successfully:

• Borrow within the means of your wallet and your knowledge. Only borrow what you know you can afford to pay back and make sure you fully understand the products or services you are using and their requirements.
• Fulfill your obligations. Be aware of all the terms and conditions and be sure to meet all requirements – they are not optional.
• Make your payments on time. Be sure to process all of your payments within the timeframes specified to remain in good credit standing and to avoid penalties and fees.

Credit options

While there are many different types of credit products available for people to apply for, they generally fall into two different categories: secured credit and unsecured credit.

Secured Credit is lent to you with the pledge of collateral, such as your home. If you do not repay the loan or line of credit given to you, the lender can take and sell your collateral to gain back the money you owed them. As the lender has a form of guarantee with this form of credit, the interest is usually at a lower rate.

Types of secured credit include a mortgage, home equity loan and car loan. These types of loans often have a fixed interest rate for the life (length) of the determined period of time.

Unsecured credit is lent to you without the pledge of collateral and often carries a higher interest rate due to the increased risk for the lender. A credit card is the most common form of unsecured credit.

A credit card is a plastic card that enables the cardholder to purchase items with a credit limit, a specified amount you can spend that has been provided by your lender. The money you spend using your credit card is presented back to you in the form of a monthly bill. If you do not pay the bill in full, you may be charged interest on the amount owed. Some card issuers provide a grace period, or short period of time, for payment to be received before interest is charged.

With the receipt of each bill you will have the option to pay the bill in full or make the required minimum payment. Paying in full is best to avoid being charged interest. By paying more than the minimum due, you will reduce your balance owed and lower the amount of interest you will be charged on the remaining balance.

Many credit cards come with fees for other services and benefits. Be sure to do your research to understand the fees and options fully before applying.

How is credit monitored?

As you begin to use different forms of credit, your actions or use of the products or services is reported by the providers to one or more of the national credit bureaus. A credit bureau is an agency that maintains records of the debts and repayments made by individuals and businesses. This information is known as your credit history or credit report. This report will not only contain information on what forms of credit you have used, but how timely you paid your bills, how much you still owe, where you live and where you work.

A lender, landlord or employer may ask the credit bureaus for a copy of your credit report to ensure they are making the right business decision by working with you. Your credit report contains what is known as a credit score. This is a statistically derived number used to define your creditworthiness and is based on your previous actions and financial habits. This number is used by banks or lenders to determine the chance that you will repay a debt. The higher your credit score the better your chance is to obtain a loan.

Our laws allow you to receive one free credit report every year or 12 month period. You can obtain your report by going to the Federal Trade Commission’s website: www.annualcreditreport.com.

Remember that credit isn’t a license to spend beyond your means. You will reap the benefits or consequences of your actions. If you have questions, don’t be afraid to ask your local NBT Banker or a credit counseling service on ways to better manage your money and reduce debt.