With the news lately filled with stories about how so many people have damaged their finances and their lives with credit card debt and other forms of financing, it’s all too easy to forget that credit plays an important role in achieving fiscal security and health. Can be a positive force. When used responsibly with wisdom and forethought, credit can be a powerful tool, capable of helping in the achievement of personal finance and business goals.
Recent statistics provide some insight into how credit is used in the United States today. According to Federal Reserve Bank figures, the combined loan debt of Americans in 1968 was about $8 billion in today’s dollars. Today, Americans owe approximately $880 billion, with a full 40 percent of Americans spending more than they owe in a single year.
Oddly enough, according to information from carddata.com, credit cards and debit cards were used to make $51 billion in fast food purchases in 2006. An Experian-Gallup Personal Credit Index survey says that nearly half of credit card users make only the minimum payment each month. According to Cardtrak.com, the average interest rate for bank-issued credit cards in March 2007 was 19 percent, which in many cases is a large portion of change spent on carrying non-essential debt.
This should not be the case, credit utilization drains economic vitality from household budgets and personal finance plans. Credit can be used as a tool to help build and secure financial well-being. However, it does involve being knowledgeable about how credit works and using that knowledge to your advantage.
Understand that every move you make, credit-wise, is recorded. That data is collected and analyzed, and a score is given to your credit behavior and debt management. There are many credit reporting agencies and credit scoring methods. Perhaps the most well-known is the FICO score, a creation of the Fair Isaac Corporation.
Credit scores are commonly used as a predictor of sorts for a consumer’s likelihood of failing to meet repayment financial obligations. Those with higher scores, above 700, are considered very good on the FICO scale, and are considered more creditworthy than those with lower scores. The better the credit score, the less risk involved for lenders, which translates into lower interest rates and less expensive credit.
For those using credit as a tool, undisciplined, impulsive spending is not part of the plan. Taking loans without a clear plan of how and when payments will be made is counterproductive for those working towards increasing the credit available to them by establishing their creditworthiness with a good credit report and high credit score.
The first smart credit step you can take when choosing between credit options, whether choosing the right credit card or shopping for a personal loan or mortgage, is to take the time to read every detail of the terms and conditions and run the numbers. . Do the math, and find out what each credit option you’re considering will cost once interest and fees are factored in.
If considering credit cards and other types of credit that may have variable interest rates, such as adjustable rate mortgages, be sure to account for changes that may occur after the introductory period has passed.
By thoroughly examining the credit opportunities in this way, the consumer can take advantage of offers like credit card no fee balance transfer and utilize it to its full potential. A balance transfer can serve as a valuable tool to help manage and reduce debt.
A balance transfer may allow a consumer to move interest carrying debt from one credit card to another credit card with 0 percent interest. This 0 percent interest is offered for a specific period, after which the rates will increase to the rate that is stated in the agreement. This period of time varies according to the specific offer made available by a particular credit card company, which usually ranges between 3 to 18 months.
This can be a smart move that results in significant savings under the right set of circumstances, especially when a no transfer fee 0 percent APR type of offer is selected. Ideally, when the interest rate increases after the introductory rate, it will be one that is lower than that of the original credit card.
Instead of paying interest on the debt incurred on the card, the consumer can focus on paying down the principal of the debt, perhaps even eliminating it altogether with effective budget planning. Many of these no-fee balance transfer opportunities also allow you to make and carry new purchases without interest.
Using this type of credit opportunity provides an opportunity to improve credit rating by making it easier to focus on repaying the loan. This is a good opportunity for someone who has started off on the wrong track with their credit by taking out enough loans that pay interest every month, eating up most of the payment, too much to be applied to the principal. less left.
Other smart ways to use credit — meaning with an eye on the future, when you want to make a big purchase, like a home, and get the best rates and terms possible — include slowly building up a good credit report. . This is done by using credit wisely, buying essentials and sticking to payment schedules reliably.
Be selective about the loan taken. Loans that are for non-essential consumer goods or luxury items should be carefully appraised if the balance will not be repaid in full by the payment due date. Is the additional cost from the interest – in the double digits for many people – that will be charged to carry the loan worth it, rather than saving up and paying it in full at the time of purchase to get it now? Smart loans are productive in nature – for something that will generate a profit, such as business equipment, or to provide something of value, like education-related expenses.
Don’t let the worst scare you away from using credit as a tool to improve your lifestyle and secure your financial health and future. Become an informed consumer and use credit wisely, developing the skills necessary to make smart choices that will get you closer to your personal and financial goals. That way, you’ll have the credit opportunities you need when it comes time to make a big financial move, such as buying a home or starting a business.