Establishing credit and making sure it stays in good standing has become a problem with many consumers these days. Learning to understand credit is an important tool in creating a good financial foundation to build from for the future.
Many consumers turn to credit when faced with unexpected home or auto repairs, as well as medical emergencies. And, credit offers convenience, enabling you to rent a car or hotel room or buy airline tickets over the phone or online.
If you don't use credit carefully, you may owe more than you can repay, damage your credit rating, and create credit problems for yourself that can be difficult to correct. A person with good credit has a history of paying bills on time. The information contained in your credit report will determine if you are approved or denied credit in the future. It can also be a determining factor in the interest rate you are charged if you are approved.
Despite all of the advantages and conveniences credit can provide, there are some pitfalls associated with credit use. Credit can be expensive. Finance charges, annual fees, and penalties can dramatically increase the cost of any purchase made on credit.
It is possible to have the best of both worlds by designing a realistic spending and savings budget. Also, comparing the cost of credit and shopping around for the best deals will help you avoid credit trouble.
It is important to understand the difference between a charge card and a credit card. A charge card is a card that is issued by a department store or gas station where the balance must be paid in full every month. Because this is not a revolving credit account, paying only a portion of the bill will cause your account to be delinquent. A credit card, such as a VisaŽ or MastercardŽ, allows you to carry a balance, provided you make the minimum payment due each month. If you pay your credit card bill off every month, make sure your card provider does not charge you an annual fee. If you usually carry a balance, look for the lowest interest rate available with few or no additional charges, especially penalty fees.
Depending on your payment and credit use habits, you may also be affected by late and overlimit fees, otherwise known as penalty fees. Changes in legislation have allowed card companies to increase the miscellaneous fees they charge customers, so it is very important to read all the terms of the card agreement.
The "Universal Default Clause" is another common hidden cost. This is a cost even consumers with good credit scores may suddenly see, when your credit card's interest rate skyrockets without notice. This clause allows credit card companies to raise your interest rate if you're late making a payment to them - or to anyone else. Basically, the universal default clause says that if you are late making a payment to any company and the late payment appears on your credit report, the interest rate on your credit card can rise to the maximum rate in your card agreement without notice and without having made a late payment to the credit card company. Experts say that consumers may have a difficult time getting a universal default clause penalty reversed. Not all credit card companies have this clause, but if they do, they include the language in the notice of change in terms to you card agreement that you receive periodically with your statement, so read everything carefully before taking advantage of any proposal.
Establishing credit is an important step to becoming a homeowner. A little common sense and caution can go a long way to maintaining your credit. Being mindful of hidden fees and using credit wisely will make it easier for you to access credit when you need it.