My Money Management

CREDIT

Credit, or the ability to borrow money, can be a powerful tool in reaching your financial goals. Or, it can be a hidden enemy for those who do not have a spending plan or do not develop and maintain responsible credit management behaviors and skills.

The Cost of Using Credit

When you use credit, you're borrowing someone else's money. You agree to pay it back at a certain time, or on a certain schedule. And for the convenience of having someone else's money available when you need it, you pay a fee. That fee is known as interest and is usually charged as a percentage of what you borrowed. That means the more you borrow, the more you'll have to pay in interest. What borrowing will cost you is also affected by how long you take to pay the money back.

Paying on Time

With most types of credit, you agree to make payments on a certain schedule, and if you're late or don't pay what's due, you'll have to pay a penalty or late fee. That makes borrowing more expensive. If you have trouble repaying, it's possible that you've borrowed more than you can afford, or perhaps your circumstances have changed. And if you ignore the problem, it will only get worse, as penalties and interest build due to late or missed payments.

Types of Credit

Loans let you borrow money that must be repaid with interest. You can obtain a loan for a specific purpose, such as financing a new car, paying college tuition and buying or renovating a home. You can get a debt consolidation loan, which combines all current debts from various creditors into a single reduced-interest payment plan. You can also get a credit line linked to your checking account that gives you bounce-proof protection in case you write a check for an amount that exceeds your account balance.Loans are generally divided into two types: secured and unsecured.

Secured loans are guaranteed by collateral, which is an item of equal or greater value than the amount of the loan, such as a car, home or cash deposit.
Unsecured loans do not require collateral and are made based on your credit score and ability to repay.

Installment loans are made for a fixed amount at the time of your application and approval. This type of loan is repaid in fixed monthly payments over a specific period of time. The finance charges are included in the payments. Auto loans and mortgages are examples of installment loans.

Credit cards are perhaps the most common type of personal credit. Unlike installment loans, credit cards allow repeated transactions up to a maximum credit limit, also known as your available credit line limit. Each time you charge something, you are borrowing the money until you pay it back. If you decide to pay the money back over time, the credit card company adds finance charges to your account. Each month, you will pay a calculated amount until the borrowed amount is repaid.