Wednesday, January 9, 2008

Understanding Credit

What is credit?

Credit is an agreement between a lending organization (such as a bank, store or credit card company) and you, the borrower. That agreement puts money in your hand, in your bank, or on a credit card, for your use. The terms of repayment, including interest charges, are usually set up front and are governed by an agreement between you and your issung bank.

Differences between Credit and Debit cards

Credit Card
You can make purchases up to your credit limit. When the bill comes, you must pay at least the minimum balance. Banks charge interest on unpaid balances. Generally, if you pay the entire bill at the end of the month, you will not have to pay interest charges. If you maintain an outstanding balance, you will be charged interest at a predetermined annual percentage rate (APR), which differs from issuer to issuer.

Debit Card
Funds are automatically taken from your account to cover charges. You can spend the total amount that is in your account.

Establishing credit

First, apply for a credit card that meets your needs and spending habits. See Find a Card. As you pay off your purchases in a timely manner, you'll build a good credit history.

Maintaining good credit

The most important thing to do is pay your credit card bill regularly. Pay the entire bill, or as much as you can afford (at least the minimum payment), each month.

If your bill is delivered late or if you won't be able to pay it on time, contact your card issuing company to make payment arrangements.

If you know you'll be carrying a balance each month, consider a credit card with a low interest rate. And be sure to learn the impact of compounding interest - the amount you're charged in interest on top of purchase and interest charges unpaid in previous months.


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