Credit Wisely

Credit Wisely: Three Steps

Step 1: Minimize Debt

  • Responsible Debt Usage: Credit provides a simple payment method but can lead to debt accumulation if not managed carefully.
  • Borrow Wisely: Only borrow what you can realistically repay with interest.
  • Over Minimum Payment: Paying more than the minimum required amount accelerates loan repayment and reduces overall interest paid.
  • Example:
    • 500 debt with an 18.5% annual compound interest rate.
    • Paying the minimum 15 per month: Takes approximately 48 months (4 years) to repay, with 200 in interest, totaling 700.
    • Paying 100 per month: Debt repaid in 6 months, with 24 in interest, totaling 524.
    • This highlights the substantial savings from paying more than the minimum.

Step 2: Know Your Rights

  • Fair Consideration: By law, loan applications must be considered fairly, without discrimination.
  • Protected Characteristics: Lenders cannot discriminate based on race, sex, or national origin.
  • Income Consideration: All income sources the borrower wishes to have considered must be taken into account.
  • Right to Explanation: Borrowers have the right to know why their credit application was rejected.
  • Transparency: Borrowers are entitled to detailed loan terms, including interest rates, payment terms, and potential penalties, before accepting credit.
  • Emphasis: You are entitled to be fully educated about all aspects of your credit.

Step 3: Build a Good Credit History

  • Qualification: Before obtaining credit, you must be qualified.
  • Creditworthiness Measurement: Credit companies assess trustworthiness based on various factors to determine credit scores.
  • Credit Score: This score determines whether credit applications are accepted or denied.
  • Factors Affecting Credit Score:
    • Payment History: Includes on-time payments, late payments, the extent of lateness, bankruptcy filings, and foreclosures.
    • Amount Owed: Considers how much you owe, available credit, credit utilization, and total debt.
    • Length of Credit History: Evaluates how long you've been using credit. A longer history is beneficial if it is free of negative elements.
    • New Credit: Opening many accounts recently may signal debt struggles.
  • Credit Score Ranges:
    • 500 or less: Poor.
    • 800: Excellent.
  • Time Investment: Building good credit requires time and consistent financial responsibility.
  • Specific Actions to Improve Credit Score:
    • Always make loan payments on time.
    • Pay all bills on time, as non-payment is reported and affects trustworthiness.
    • Use a variety of credit types.
    • Ensure all information in your credit history is accurate.
  • Seeking Help with Debt:
    • If struggling with debt, seek reputable assistance.
    • Be cautious of fraudulent debt consolidation or reduction programs.
    • Vulnerable borrowers are often targeted by predatory services.
  • Reputable Resources:
    • The US Department of Justice approves debt education providers.
    • Find a list of approved providers on the Justice Department website (www.justice.gov) by searching for debt education providers by state.

Benefits of a Good Credit Score

  • Loan Approval: Individuals with good credit scores are more likely to be approved for loans.
  • Lower Interest Rates: Better credit leads to more lenders willing to lend money at lower interest rates. Low-risk borrowers access decreased rates.

Consequences of Poor Credit