Money Matters - Credit and Credit Cards

Credit is a contract in which you promise to pay in the future for goods, services or money received today. Forms of credit backed by collateral (money or property you put up as a guarantee you will repay) are secured. If you do not repay as agreed, the lender will be able to repossess the collateral. Car loans and mortgages are examples of secured loans. Most credit and charge cards are unsecured, but there are some secured cards available for those who cannot qualify for an unsecured card.

Credit 101: Most Commonly Used Types of Credit

Debit Card – allows you to access funds in your checkng or savings account. It is accepted wherever the logo on the card is displayed. This is not a loan and using it does not establish a credit history.

Credit Card (revolving account) – allows you to make purchases or take cash advances and pay back a portion of the balance you owe each month with interest. The minimum payment due is usually a percentage of the outstanding balance, typically 2-3%. Most credit cards charge other feees (i.e. cash advance fee, late payment fee, annual fee) in addition to interest.

Charge Card (open-ended account) – allows you to purchase items or taje cash advances and reuires you to pay the entire balance in full eac hmoth. No interest will acrue if the balance is paid as agreed, but there is often an annual fee. Other fees may also apply (late fees, cash advance fees, etc.).

Installment Loan (close-ended account) – allows you to borrow the money you need up front (usually for a specific purchase such as a car, education, home, etc.) and then repay it over a specified period of time with interest. The payment is usually the same amount every month.

Pros:

allows you to purchase needed products and services now and pay for them over time (i.e. higher education, car, home).

More convenient than cash for some reservations (i.e. airline, hotel, car rental) and purchases.

Safer than carrying cash.

Useful in case of short-term emergencies (i.e. car repair).

May provide you with esirable benefits (purchase protection, travel insurance, frequent flier miles, cash back bonuses, etc.)

Helps establish a credit history.

Cons:

Interest and fees can be considerable.

Easy access to money presents a temptation to overspend & abuse your credit privilege; thereby, committing too much future income to credit payments.

If credit card accounts are not paid as agreed, then your credit history will be negatively impacted for a number of years after the event. This could affect your future applications for mortgages, other installment loans, or other credit related applications.

Available credit may offer a false sense of security and may be thought of as emergency “savings” or a source of income.

Expense of using credit may outweigh the perks (i.e. purchase protection, travel insurance, frequent flier miles, cash back bonuses, etc.)

What's the Deal with Credit Cards?
Credit Cards are becoming standard issue, and causing a lot of problems for those who don't kno how to weild their unruly power. Check yourself with these tips and avoid future anguish.
Before you go out and sign the receipts you've got to get yourself a card. Here are some guidelines to picking one.

Keep an eye on that annual percentage rate; intro rates may look tempting but remember you're going to have that card longer then the four month intro period.

Avoid the abbual fees; you should be able to find a card with low interest rates and no annual fee.

Keep it to one card; credit cards aren't purses or retro baseball caps, one should do the trick.

Here are some tips on how to handle that plastic in your wallet

Pay on time; the credit card mob's not going to come kneecap you, but they will hit you with some stiff interest rates that'll quickly eat into your Friday night cash reserves.

Avoid the cash advance; the interest rates for advacnes are astronomical, sometimes nearly double the normal rate. Hey, worse comes to worse, hit the parents up. That's what they're for right?

Set aside a poriton of your cards' limit to pay for emergency expenses such as car repair. Running up a bill that's over the limit is considered a “violation” and companies can sla you with extra fees or even freeze or cancel your account, all definite bummers.

Remember...
The history you develop with this card will have consequences in the future. Your credit score may seem obsucre and unimportant now, but when it comes time to buy a crib or some new wheels, you credit score is what's going to make or break your chances.
Not digging the credit card, or can't convince the parents you are ready?
Try a debit card; it links directly with your checking account and once the money is gone you can't spend any, therefore no debt. Many carry a Visa or Mastercard logo and will work wherever those cards are accepted.