10 Things You Must Know About Credit
Your first experience with credit can be a little confusing. Managing credit wisely is an important factor in your financial success so understanding all the elements of credit is key. Building a basic understanding of how credit works can help you make the right borrowing and payment decisions throughout life.
Credit and credit cards are so easy to use, it's hard not to think of them as an extension of your wallet. Unfortunately, being careless with your credit usage can lead to trouble, particularly if you borrow more than you can afford to pay back right away. Even if you've been using credit for years, it never hurts to re-familiarize yourself with the very basics of what credit is and how it works.
Never underestimate the value of good credit. If you've operated under the assumption that credit is used for more than just credit cards and loans, you couldn't be further from the truth.
Businesses who extend services to you before you paid for them have a valid reason to check your credit and may deny you or include additional requirements if your credit isn't in good shape. For example, you need credit for buying or renting a home, getting a new job, and even for getting cell phone or other utility services.
Good credit can be distilled down to a reputation for being responsible with the money you've borrowed. Don't expect to go from 0 to 850 overnight. It takes time to build up a good reputation—you need months, even years of positive payment habits to prove that you're a trustworthy borrower.
There are so many different types of credit cards—cards with low interest rate, cards that pay travel rewards, cards for people with troubled credit history—it's just as easy to get one that doesn't fit you as it is to get one that does fit you.
Choosing the right credit card means understanding your current credit standing and nailing down your wishlist of credit card features. For example, if you're just starting out with credit, you may not qualify for a top-tier rewards credit card. Similarly, if you have excellent credit, you wouldn't be served well with a secured credit card.
Carrying too much debt can have a negative influence on your credit, making you look riskier to future lenders because you've borrowed more than you can afford to pay back. Making good financial choices and using credit only as you need to will keep you from being bound by debt.
You may have relationships with individual credit card issuers and lenders, but they share information about you with credit bureaus. These third-party agencies collect information from various businesses, compile it to create your credit report, then share it with other businesses whenever you make a new application for credit.
Almost every credit move you make is chronicled in your credit report so businesses can decide whether to do business with you and how much to charge.
Federal law entitles you to a free copy of your credit report from each of the three credit bureaus each year. This free credit report—which you can access through AnnualCreditReport.com—doesn't require you to signup for any other products or services, so you have absolutely no obligation.
You're may also be entitled to a free credit report whenever you have a credit-based application denied, you've been a victim of identity theft, or you're unemployed and planning to look for a job soon.
Interest is the cost you pay for the convenience of paying back money over time and is partly based on your credit history. With a good credit history, i.e. a reputation for handling credit responsibly, you can typically expect to pay lower interest rates than borrowers who haven't been as diligent about paying their bills on time.
If you think you qualify for better rates, having a high credit score—700's or better—puts you in a good position to negotiate a lower interest rate.
It doesn't take long to build a collection of credit cards. As soon as you get one credit card, it seems every other creditor wants to offer theirs too. Having too many credit cards can affect your credit score and make it hard to keep up with your credit card payments.
Opening too many credit cards in a short period of time can disqualify you from earning the new cardholder bonus with some credit cards. Spacing out your credit card applications allows you to take advantage of these generous rewards offers.
You may be tempted to retaliate against an unaccommodating credit card issuer by closing your credit card and ending your financial relationship. However, closing a credit card might hurt you a lot more than it will hurt your creditor, particularly if you're still carrying a balance. Sometimes it's better to grin and bear it, so to speak.