Remember, credit is a financial tool that can help you get what you want. Financial tools themselves are neither good nor bad; they are just tools. How you use the tools available to you determines whether they will have a positive or negative effect on your life.
Credit comes in many forms: credit cards, charge cards, car loans, mortgage loans, home equity loans, personal loans, consolidation loans, student loans, and more. When you use credit, it becomes a debt. Anytime you use credit, you are relying on the fact that you will be able to pay back the debt in the future, regardless of what is happening in your life.
When you purchase an item on credit, you are committing to pay extra for it in order to get that item now. This extra amount is called interest. The amount of interest you pay will be determined by the rate of interest, how the interest is calculated, and length of time interest is paid. You will also pay additional fees to use some loans and credit cards. The less interest and fewer fees you pay, the more money you have for things you need and want.
Whenever you use credit, you should calculate the true cost of an item, which will include all fees and interest you pay. It is not uncommon for people who make purchases using credit to spend two to three times more than if they were paying cash for the purchase.
The most common types of credit include revolving credit, installment credit, and service credit. Revolving credit allows you to borrow up to a specific dollar amount. The monthly payment may vary as your balance changes. As you repay the credit, you will be able to borrow it again. Credit cards are revolving lines of credit.
Installment credit allows you to borrow a specific amount, for a specific period of time. The monthly payment usually remains the same. When you have repaid the amount, the loan is closed. Car and mortgage loans are considered installment credit.
Service credit allows you to pay for a service at a later date. If you cannot make the payment in the agreed upon time, there is a penalty. Utility companies offer this kind of credit.
Most types of loans can be categorized as secured or unsecured. Secured loans are backed by property that has value, also called collateral. An example of a secured loan is a car loan, as the car is security or collateral for the loan. In other words, if you don't make the loan payments, the lender can take back or repossess the car.
On the other hand, an unsecured loan does not have any property backing the loan. If you, for example, apply for a signature loan at a bank or credit union, this would be considered an unsecured loan. Most credit cards are unsecured; however, not all are. Some credit cards are known as secured credit cards. A secured credit card may be secured by your savings account or by the merchandise you purchase. If you don't make the payment, the lender can and will take the item you pledged as security. Before you sign any credit card agreement, make sure you read and understand all the fine print.
When you want to borrow money, lenders will look at a number of things before agreeing to grant credit to you. First, lenders want to know if you have the financial ability to repay the loan. This is known as capacity. Second, lenders look for any property you have to back the loan - again, this is called collateral. And third, lenders want to know if you will make your payments and how you have handled other loans in the past. This is called character. Capacity, collateral, and character represent the three C's of credit.
To understand the role a lender plays in the credit-granting process, you might think about what you would want to know if someone wanted to borrow money from you. You certainly would want to know that they have a job and that they have the ability to pay you back. You would want to know how long they have been at their job and that they would make every effort to pay you back. Knowing whether the potential borrower repaid their other loans on time and in full would also be important to you. Lenders are no different.
Lenders are in business to lend you money - it's their job. They have federal and state government regulations, as well as company guidelines they have to follow. Some people think that lenders look for any reason not to give a loan, but this simply is not true. Lenders want to make loans, though they want to make them to people who will repay the loan.
The way you handle loans made to you will determine whether you have good credit. What exactly does it mean to have good credit? You can achieve good credit by making all of your payments, as agreed, each month. If you want good credit, you cannot skip payments or pay less than the full amount due. If you have made financial mistakes in the past, it's still possible to re-build good credit by committing to restoring your credit report and paying all of your bills on time and in full.
Chris Esposito specializes in home renovation loans for borrowers who want to buy and rehab a property for their residence. For more info about home rehab loans, such as the FHA 203(k) program, visit www.DirectRehabLoans.com, or call (877) 876-3688.
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