What is Credit?

Credit is money you borrow to pay for things. Credit is usually referred to as a loan. You make a promise to pay back the money you borrowed plus some extra. The extra amount is part of the cost of borrowing the money.

If you use credit carefully, it can be useful to you. If you are not careful in the way you use credit, it can cause problems.

Good credit means you make your loan payments on time and repay the money you owe. If you have a good credit record, it will be easier to borrow money in the future. A credit record that shows problems will make it harder for you to borrow money in the future.

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What about using Credit?

When you want to make a large purchase, having good credit is very important. It will enable you to take out a mortgage on a home or finance a car, but be careful when you use it instead of cash. Remember, it is not income, only a loan which must be repaid. You should limit the amount you pay on credit, excluding mortgage, to 15-20% of your monthly net income.

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Why is Credit Important?

• Credit can be useful in times of emergencies
• Credit is sometimes more convenient than cash
• Credit allows you to make large purchases such as a car or a house

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Tips Before Applying for Credit

Ask yourself these questions before obtaining credit:

• Do I need this?
• Do I need it now?
• Can I wait until I have cash to pay for it?
• Can I get credit?
• How much more will I pay if I buy on credit?
• Can I afford the monthly payments?
• What is the total cost of credit?
• Are there any fees?
• What is the annual percentage rate?

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When You Apply for Credit

When you apply for credit, the lender will review three main factors to decide whether you are a good credit risk and if you will be able to pay back the loan. The factors are often called the Three Cs.

Capacity
Capacity is your present and future ability to meet your payments.

Capital
Capital is your savings and other assets, which can be used as collateral for loans.

Character
Character means how you have paid your bills or debts in the past.

Banks use credit reports to obtain character information. You can request a copy of your credit report by contacting any of these credit reporting agencies. In the state of Maryland, you can obtain one free copy of your credit report annually. In other states, cost will vary.

Equifax, Inc.
PO Box 105873
Atlanta, GA 30348-5496
1-800-997-2493
www.equifax.com

Experian
PO Box 2002
Allen, TX 75013
1-888-397-3742
www.experian.com/consumer/index.html

TransUnion
PO Box 1000
Chester, PA 19022
1-800-888-4213
www.transunion.com

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Checklist for Credit Decisions

Here are some questions you might be asked when applying for credit:

• How long have you been in your job?
• How much money do you make each month?
• What are your monthly expenses?
• How much money do you have in checking and savings accounts?
• Do you own a house?
• Do you have investments or other assets (e.g., car)?
• Have you had credit in the past?
• How many credit accounts do you have?
• Have you ever been denied credit?
• Have you ever filed for bankruptcy?
• Have you had any outstanding judgments, property repossessed or foreclosed upon?
• Have you ever made late payments?

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How Much Debt Can You Handle?

Your monthly mortgage payment - including principal, interest, taxes, and insurance - shouldn't exceed 25 percent of GROSS income. Click here to find out What Credit Really Costs.

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Danger Signals

• You have no cash reserve.
• Your revolving charge accounts are never paid up.
• You continually send creditors less than is actually due.
• You put off medical or dental visits because you can't afford them right now?
• You are unsure about how much money you actually owe.
• You are working a second job or overtime to make ends meets.
• You lost your job and immediately you are in financial trouble.
• You are threatened with legal action.
• You are paying bills with money earmarked for something else such as retirement, savings, or medical expenses.

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Tips to Manage Your Credit

Once you get credit:

• If possible, pay off your entire credit card bill each month. If you can’t, try to pay more than the minimum balance due. This will reduce finance charges and total interest paid.
• Pay on time to avoid late fees and to protect your credit. If you cannot pay on time, call your creditor immediately to explain the situation. They may waive late fees or be willing to make different payment arrangements.
• Always check your monthly statement to verify transactions. Call your creditor right away if you suspect errors in your statement.
• Ignore offers creditors may send you to “reduce” or “skip” payments. You will still be charged finance charges during this period.
• Think about the cost difference if you purchase your item with cash versus if you purchase your item with credit:
  
  

  Remember, if you purchase a $500 stereo with a credit card with a 20% APR, it will cost $1,084 and take 9 years to pay off if you only pay the $10 minimum monthly payments.

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Ways to Establish and Keep a Good Credit History

There are several steps you can take to establish and maintain a good credit history.

• Always pay your bills on time.
• Never borrow more than you can comfortably pay back.
• Borrow only the amount you need.
• Know how much you owe at all times.
• Contact lenders immediately if you expect to have a payment problem.
• Develop good savings habits to handle financial emergencies without borrowing.
• Report lost or stolen credit cards immediately.
• Never give your credit card number over the phone unless you initiated the call.
• Open a checking account and a savings account.
• Do not apply for too many credit cards. Even if you don't use them, the credit limits are taken into consideration when you apply for credit.

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