Credit Information

A Credit Card gives financial flexibility to the consumers. It helps to purchase something without having to pay for it immediately. The credit card issuing company makes the payment on behalf of the customer but the customer in turn remains liable to pay the outstanding amount to the company within a definite period of time which may vary (from 20 to 55 days) depending upon the credit card type and the issuing company. If the customer fails to write-off the outstanding payable amount (full or partial) due to the company within the specified time-frame then the company would charge a monthly interest rate on the amount outstanding. The interest free period of payment is known as the Grace Period. Rate of Interest charged by the credit card issuing company may vary from scheme-to-scheme and from company-to-company

Types of Credit

Credit is a powerful tool that comes in several forms. It allows you to buy now with the promise of paying later. By understanding how each works, you’ll learn to manage credit successfully and use it to your advantage.

Loans let you borrow money that must be repaid with interest. You can obtain a loan for a specific purpose, such as financing a new car, paying college tuition and buying or renovating a home. You can get a debt consolidation loan, which combines all current debts from various creditors into a single reduced-interest payment plan. You can also get a credit limit linked to your checking account that gives you bounce-proof protection in case you write a check for an amount that exceeds your account balance.

Loans are generally divided into two types: secured and unsecured.

  • Secured loans are guaranteed by collateral, which is an item of equal or greater value than the amount
    of the loan, such as a car, home or cash deposit.
  • Unsecured loans do not require collateral and are made based on your credit score and ability to repay.

 

Installment loans are made for a fixed amount at the time of your application and approval. This type of loan is repaid in fixed monthly payments over a specific period of time. The interest charges are included in the payments. Auto loans and mortgages are examples of installment loans.

Credit cards are perhaps the most common type of personal credit. Unlike installment loans, credit cards allow repeated transactions up to a maximum credit limit, also known as your available credit limit. Each time you charge something, you are borrowing the money until you pay it back. If you decide to pay the money back over time, the credit card company adds interest charges to your account. Each month, you will pay a calculated amount until the borrowed amount is repaid.

 

How Much Credit Can You Afford?

The first step to using credit wisely is figuring out how much credit you can afford to take on. Take a long, hard look at your current and future financial situation before taking on any new debt. You can do this by determining your debt-to-income ratio, which looks at how much you owe each month compared to how much you earn.

Debt-to-income ratio
Your debt-to-income ratio usually gives a clear picture of your financial well-being. To calculate it, add up your fixed monthly expenses, such as rent, mortgage or credit card payments (you do not have to include expenses like utilities or groceries). Then divide the total by your monthly take-home pay (net pay after tax deductions).

Monthly debt repayment $800

=

Monthly take-home pay $2,000
Debt ratio 40%

As a general rule of thumb, your debt-to-income ratio should not be higher than 28%. Anything above this could mean being denied credit or paying a higher interest rate on your loan. Your ratio gives lenders a good indication of how much additional credit you will be able to handle.

 

Applying for Credit

Creditors look at several key indicators when you apply for credit. You have considerable control over these factors based on how you manage your credit, so it’s important to always keep them in mind.

The 3 Cs of good credit
Client History–How responsible you are about paying bills on time.
Capacity–Your ability to pay back a loan based on your income and financial position.
Collateral–Security for the lender in case you don’t pay back the loan. A house, for example, would be used to collateralize a mortgage.

Positively changing your “3 Cs” will help improve your credit standing. The first two Cs are extremely important in developing your credit score or credit rating.

10 Tips for Good Credit

After you’ve decided on the type of credit you need and how much you can afford, follow these steps for maintaining a good credit history.

  1. Shop around for the best credit terms.
  2. Understand the terms of the agreement before you accept a loan or credit card.
  3. Save money each payday for emergencies.
  4. Set a monthly limit for charges and stick to it.
  5. Shop as carefully with credit as you do with cash.
  6. Don’t take on monthly credit payments unless you’re certain you can meet them.
  7. Pay bills promptly and in full to keep interest charges low.
  8. If you charge day-to-day expenses, pay them in full each month.
  9. Keep credit card information (including the phone number of the issuer) in a safe place in case your cards are lost or stolen.

Keep copies of your sales slips and compare the charges when bills arrive. If there’s a mistake, call your

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