Credit is never free. No matter what type of loan or credit you have, it has to be paid back.
When a creditor lends you money, interest is always calculated into the loan amount. The amount of interest you are charged can vary greatly, depending on your credit score.
If you have an active checking account at a bank or credit union and are successfully living on a budget, you may want to consider applying for credit. If you haven't yet mastered the art of budgeting, you might want to hold off on seeking new credit.Payments
Every time you make a payment to a credit card company, or a utility company, or make a loan payment on your car or mortgage, it is reported to the three main credit bureaus. If you are late with a payment, that is also reported and shows up in your credit report. Having a poor credit score can seriously affect your ability to obtain credit. If you are approved, many times you will charged a much higher rate of interest and receive less favorable terms than someone with a good credit history. The best way to avoid massive credit card debt is to simply not have a lot of credit cards. If you do use a credit card for purchases, pay off the entire amount every month. This avoids costly interest charges and also improves your credit rating. Try to use cash for purchases. It's been proven that people who shop with cash spend less and give more thought to what they purchase. Impulse buying can wreck a budget.
Applying for Credit
A lender will ask many questions when you are applying for any type of new credit. You will need to provide income information along with a rough estimate of your monthly expenses. They may ask how long you have been employed at your present job and what type of assets you have- such as a car or home. Your responses, along with your credit report, help them determine your creditworthiness. They want to be confident that you can and will repay the loan you are asking for.
Before applying for new credit, you should ask yourself a few questions, also. Do you really need to take on more debt? Will you comfortably be able to make the additional monthly payment or will it be a burden? Make certain that you actually need additional credit before you commit to more debt.
Here are three things that most lenders take into consideration when deciding on whether to approve a loan for a customer.
- Capacity. This is your ability to make on-time payments. In other words, your income. Lenders like to see steady employment and at least one year of working for your current employer. They will also look at your debt to income ratio.
- Collateral. This can be savings, investments, or other assets which you own. Lenders want to assess your ability to manage money.
- Character. This is basically your credit report. It will show creditors if you have paid your bills in a timely manner and paid off your financial obligations in the past.
Tips for a good credit record
Pay off your balance in full every month.
If you can't pay it off in full, then pay the most that you can. If you only make the minimum payment each month, you will never get out of debt.Pay on time.
Making timely payments is one of the best ways to build good credit. You will also avoid excessive interest payments and expensive late fees.Check your monthly statement.
Always go over your credit card statements and check them for accuracy. Mistakes do happen. If you see something unfamiliar, call the company and inform them immediately.Shop for the best deal on a credit card.
Interest rates are uniformly high on credit cards. Try to find one that charges 15% or less. The higher the rate, the more you pay. Try to avoid credit cards which charge an annual fee.Maintain a low "Debt-to-Income Ratio."
Only take on new debt that you truly need and can fully repay in a short amount of time. The higher your income, the higher the debt you can carry. But it's always best to have a very low ratio.
Don't apply for too many loans or credit cards.
Each time you apply for a credit card or loan, the creditor makes an inquiry to the credit bureau. These are all noted in your credit report. When a lender sees a lot of inquiries, it sends up a red flag that the borrower may be having financial difficulty.
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