A study carried out in the USA in 2018 highlighted that 80% of Americans between the age of 30 and 49 owned credit cards. The statistic shows the importance of credit to the average American. You may think you don’t need credit until you need it.
Credit helps supplement your salary. Credit can help to purchase goods and services without ready cash. In the age of the internet, credit can facilitate online payments.
However, you may need to understand various concepts such as credit scores before you start using credit cards. Understanding credit and credit scores isn’t as tough as you might think. The following is a beginner’s guide to credit to show you how to manage!
What Is Credit?
Credit refers to debt. When you own a credit card, you essentially borrow money from issuers to purchase goods and services with the intent to pay later. The credit card issuers benefit from the relationship by earning interest on the borrowed money.
Terms Used in Credit
Credit included various terms such as APR (Annual Percentage Rate). The APR denotes the amount of interest you will pay at the end of 12 months. Most credit cards offer 0% APR for the first year of using a credit card.
Ensure to enjoy the grace period, as you will be required to pay around 20% in the subsequent years.
Cash advance refers to the use of your credit card to get cash. Do you sometimes lack the cash to conduct some urgent transactions? Worry not, credit can help you to get cash advances through an ATM machine.
So, as you can see, credit forms an integral part of adult life.
A balance refers to the amount that you have borrowed on your credit card. Have you taken out $1,000 in the last month? That is your credit balance.
The credit limit of your account refers to the maximum amount of money that your issuer will permit on your card.
Balance transfer refers to the movement of existing debt to another card. You may have opted to shift your allegiances to another credit card. However, you will still need to clear your debt obligations with your previous issuer.
You may decide to transfer the debt for future repayment. Lastly, credit scores refer to the level of trust accorded to you by financial institutions.
Understanding Credit Scores
Credit scores usually refer to the ratings provided by FICO. Many financial institutions will look at the company’s data to determine your status.
The following ranges provided by FICO will guide you on how to understand your credit score:
740 – 850 rating – Very good
670 – 739 rating – Good
580 – 669 rating – Fair
300 – 579 rating – Poor
The credit score guide will help determine how much credit you can receive. Poor credit scores can encourage financial institutions to limit your credit advances. Check this page to learn more about loans available with credit checks.
Good credit scores will ensure that you receive enticing credit packages. Who else would want to deal with individuals that have very little trust rating?
How to Improve Your Credit Rating
Improving credit score is a task that requires discipline. Many credit card issuers look at the repayment patterns to determine credit cards scorers.
Do you delay in paying your bills? Well, chances are, you will get a low credit score. Financial institutions will easily trust individuals that pay their debts on time.
Consistency in early repayments will encourage the issuer to increase your credit balance and get more interest without many risks. Therefore, the moment you get access to credit, ensure you strive to make the repayments within the stated duration.
Secondly, to improve your credit score you will need to check on your credit utilization. Credit utilization refers to the amount of debt you own in relation to the credit limit. Individuals that borrow the maximum amount of money allowed show a big appetite for debt.
Remember, financial institutions are always watching. High credit utilization will pit you as a risky customer and the issuers will have no choice but to limit your credit rating. Show caution with how much money you can borrow at a time.
Thirdly, reduce your spending habits. Credit often causes many temptations. Before you purchase your dream phone or motorcycle, remember that you will eventually repay the money with interest.
Focus on necessities and avoid impulse buying. Such an attitude will lead to the growth of your credit ratings.
Requirements for Getting Credit Cards
Before you can get a credit card, you will need to prove you have attained the age of 18. Some credit cards will overlook individuals under the age of 21 unless they prove their source of income or assets.
Otherwise, if you fall below the age of 21, you will need to use your parents or guardians’ credentials to access credit. That way, the banks reduce risk.
Types of Credit Cards
Traditional credit cards allow anybody to borrow money as long as they have a good credit score. The issuers regularly check on credit ratings to determine the level of credit limits.
Do you have a bad credit score? No worries, secured credit cards can offer you money without much emphasis on credit rating. However, you will need to pay a deposit to secure your account or give up one of your assets as collateral.
Rewards credit cards provide some incentives to the owners. The cashback cards allow the borrower to get back a percentage of their spending. For example, if you spend $ 5,000 on shopping, the credit card will remit like 1% of the money to your account.
Specialty cards help to cover special groups in society. For example, the student cards help to cover students that lack a credit history. The diverse nature of the credit industry shows that almost every adult can access credit.
Do You Now Understand Credit?
Understanding your credit score and the notion of credit has never been easier. You only need to know the few concepts related to credit cards such as interest rates, repayment periods, and balance.
Most of the credit card providers will readily provide you with the necessary information you need regarding credit. Do not hesitate to get a credit card.
Learn more about credit, managing your finances, lifestyle, internet use and so much more on our blog.