What is Credit? Credit is more than a plastic card for making purchases. Credit is a contract, a commitment to repay the amount of money borrowed, plus interest, in a timely manner. Failure to repay your credit as agreed can affect your ability to borrow, rent, or even get a job. Credit is an earned privilege and must be carefully cultivated. If not taken seriously, your credit history is easy to tarnish and difficult to restore. Understanding how credit works is a positive step in developing a strong credit history early in life.
Responsible Borrowing – Credit can be a valuable financial tool when used wisely. The key is to make informed financial decisions, maintain manageable debt, borrow for the right reasons, and borrow only what you need and can afford to pay back. Credit comes in many forms: car loans, student loans, mortgages, home equity loans, credit cards, department store cards, gas cards and payday loans. Using credit to build wealth, such as getting a college education or purchasing a home, makes financial sense. Using credit to finance a lifestyle beyond your means, such as purchasing the latest electronic device or designer shoes with a credit card, can quickly balloon into a mountain of debt that is difficult to manage.
Before you decide to use credit, ask yourself these questions to help make a sound financial decision:
- Do I already have too much debt to handle?
- Is this a planned or impulse purchase? Do I need it?
- What is the purpose of the debt? Is it a luxury item I can’t afford, or an investment in my future, such as a college education, a car to drive to work, or an affordable home for my family?
- How long am I willing to pay for this purchase, and will it still have value when the loan is paid off?
- Can I easily afford the payments, both now and in the future?
- How much interest will I pay in order to have this item now?
Warning signs that may indicate you have too much debt to handle:
- Your credit card balance is at the maximum credit limit
- You are paying only the minimum balance on credit cards
- You are using your credit card to pay for everyday living expenses
- You are not paying your bills on time