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Guide to Money: Getting a Good Start


If you manage it well, credit can help you get the things you want, such as an education or a car. However, if you borrow too much and have a hard time paying it back, it can hurt your chances of borrowing money in the future, as well as cramp your lifestyle today.

 

How Lenders Rate You


Before lending you money, lenders want to find out if you're able and likely to repay a loan, so they'll ask about your job, income, savings, debt, checking accounts, and investments. As part of a credit check, lenders may buy a copy of your credit report from a credit bureau to help them decide if you're a good credit risk. Your credit report contains information on the amount of money you owe, including auto and credit card debt, how promptly you pay your bills, and where you live and work. Although information on your account is continuously updated, negative information stays on your report for at least seven years.

How to Get Credit

 

  • Open a savings and checking account and use them responsibly. If you save money on a regular basis, you're proving to a lender that you know the value of your money. A credit union is a great place to start your accounts.

  • A lender might suggest a parent or other adult co-sign a credit application if you don't have an established credit history, a down payment, or enough time on a job. A co-signer acts as a reference for you and promises to repay your loan if you can't.

  • To help establish your credit history, check with your credit union for information about share-secured loans and credit cards. In general, here's how they work: You open a savings account with a balance equal to the amount you want to borrow. Your account serves as security, or collateral. If you don't make your monthly payments, the lender can take the amount you owe from your savings.

  • Make as large a down payment as you can afford. It not only shows the lender you're more likely to repay the loan, it also reduces the amount of interest you'll pay over the term of the loan.

Types of Credit

 

Consumer loans come in two basic types: secured and unsecured. If your loan is secured, you'll have to offer the lender collateral, or security. Collateral is the property the financial institution has a right to take if you don't repay the loan. For example, if you borrow money to buy a car, the car will serve as collateral for the loan. If you don't make your loan payments, the lender can repossess the car. If your loan is unsecured, you don't have to offer the lender collateral—your promise to repay is enough if the lender thinks you're a good risk. These loans also are known as "signature" loans because your signature on the loan application is all you need. If you don't make your payments, the lender can start legal action to get the money, which can harm your credit rating. Credit cards are one type of unsecured loan.
  • General purpose credit cards, such as MasterCard and Visa, are issued by many credit unions, other financial institutions, and companies. These revolving accounts, which may charge an annual fee, allow you to charge up to a preset amount—your credit limit—and either pay the balance in full each month or extend payments over time. The quicker you pay off the balance, the less interest you're charged. Surveys show you're likely to find the best deal on these credit cards at your credit union. Many credit unions offer lower interest rates, lower annual fees, and better grace period options than elsewhere.

  • Retail store credit cards are revolving accounts that can only be used at the stores or companies that issue them. Although they generally charge no annual fee and may be easier to get than general purpose credit cards, they usually charge a higher rate of interest.

  • Travel and entertainment charge cards, such as American Express, are single payment accounts—you generally have to pay the balance in full each month. You don't have to pay interest on charges you make within the billing period, but you're charged an annual fee and interest on late payments.

  • Oil company cards generally require you to pay your bill in full each month. However, for more expensive purchases, such as tires and car repairs, some issuers let you make monthly payments and charge you interest.

The Costs of Credit

 

Loan rates and terms from finance companies, retail stores, and financial institutions can vary greatly. Compare these things when shopping for credit:
  • Annual percentage rate (APR): This is the standardized interest rate you must pay the lender each year for the use of borrowed money.

  • Finance charge: This is the total dollar amount the loan will cost you. It includes fees, interest, plus any other charges.

  • Loan maturity: A longer repayment period lowers your monthly payments, but increases the total amount of interest you pay.

  • Grace period: This is the length of time you have before interest gets charged.

    For example, on credit cards the grace period for new purchases is typically 20 to 30 days. If the card doesn't have a grace period, or if you carry over a balance or take a cash advance, you're usually charged interest right away.

A Checklist for Smart Borrowing

  • Don't sign for a loan until you understand all the terms, and don't be afraid to ask questions.

  • Limit your debt to your ability to repay and don't go into debt for items you don't really need. Don't let your bills for credit exceed 10% to 20% of your monthly take-home pay. When you're on your own, no more than one-third of your gross income should go to repay your monthly debt, including rent or mortgage payments.

  • If you stay within your credit limit but pay only the minimum monthly payment, you could be in debt forever with a credit card. Choose your credit cards carefully, use them responsibly, and pay off card balances in full each month.

  • Don't have more credit cards than you need. Lenders may not want to lend you more money than you already have available through your credit cards, even if you don't ever charge that much.

  • Combine your use of credit with a savings plan. After you pay off a loan or credit card, redirect that same monthly payment to your savings account.
  • Control your debt. If you have trouble paying bills and just let things slide without first seeking help, the resulting negative information in your credit report may seriously limit your ability to borrow money, rent an apartment, or even get a job.