If you often find yourself thinking "To hell with the cost," it might be a good idea to think about what credit is and to keep in mind the "pay later" aspect of it. Because the later you pay, the more the interest adds up. And the greater the interest, the steeper your bill!
Credit is a practical tool as long as you use your head.
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Using Credit Wisely
The golden rule of credit is to make sure you have the means to pay it back in the short term. Otherwise, non-payment can eventually lead to the seizure of your property and a sharp dive in your credit score. Not cool.
When used properly, in exchange for spreading out your payments, credit lets you pay for things faster without waiting to enjoy them, and gives you time to pay for your purchases without it costing you a cent.
For example, when you buy something with your credit card, you pay nothing until you get your bill, which gives you about three weeks to pay off the balance. There could be up to a month and a half between the purchase and the payment due date.
As long as you stay in control and pay the balance off each month, credit can be really great! But if the balance isn't paid off quickly, watch out! These days, depending on the card, interest rates can vary from less than 10% to as much as 30%1! That's quite a difference.
What is a Credit Score?
It's the value of your credit in the eyes of financial institutions. The better someone's score, the easier it is to do business with him or her, especially when it really matters.
To improve your credit score, you need to:
- have the necessary funds in your account to cover your preauthorized payments
- pay your bills on time
- pay back at least the monthly minimum on your credit card before the due date, etc.
Feel free to ask for a low credit limit to start building your score. It's a good way to build a pristine credit history. Later, you can up the limit when you are more experienced with credit.
Once you have become a more active consumer, be careful not to get overdrawn on your account. That means incurring an expense that puts you in the red, so to speak. A single non-sufficient funds (NSF) transaction, or a few unpaid balances, can scar your financial reputation. It catches up to you when the time comes to buy a car or a house—that's when the fun stops.
Of course, it's not mandatory, but overdraft protection could help you protect your score.
1. For information on the rates in effect, contact your advisor or call 1-877-522-3863 (toll free).