Credit can be incredibly important to your financial health, but it can just as easily spell trouble. It allows you to get the big things you need — like a car or a home — and the little things you want. But if it’s mismanaged, it can quickly do things to your financial reputation that may take years to repair.
Our goal is to help you save for your retirement but if you are worried about debt, you might make choices that could get in the way of your ability to save. Here are a few things to keep in mind when considering using credit.
Credit terms are designed to keep you paying, not saving.
Credit was designed to help you when don’t have enough money to purchase what you’re after by turning what would be a large payment into smaller monthly ones. The problem is that as the amount you owe increases, so does your monthly payment, because additional charges and interest compound.
What may have started out as a small monthly payment may grow into an unmanageable monthly burden and here’s why: minimum payments are designed to cover the interest first. That means you may not be decreasing the original amount owed, which increases the length of time you’ll need to pay down your debt. You’re paying interest on your outstanding balance, but not paying down the principle. Miss a payment and your credit score suffers, making it more difficult for you to get credit the next time you might need it.
Daily Finance has five simple rules that can help you manage your credit successfully.
Interest makes getting a loan possible, but interest isn’t your friend.
Credit gives you access to money you don’t have, and in return, the lender will ask for a percentage of what you borrow — the principle — and that’s your interest rate. Rates can vary wildly based on many factors including the type of purchase, the amount you want to borrow and your credit score (these five rules spell it out).
Often, to get new customers, lenders will offer very low introductory rates, which will increase to a market rate after a certain period of time. You need to look for that information and take note. For example, a credit card might start with 8% interest for 90 days and then jump to the national average of 15%! That rate is applied to whatever balance you still owe. In many cases, rates can be shopped or negotiated — it’s in your best interest to be proactive when it comes to interest rates.
In an effort to avoid high interest rates, some people game it — by moving their balances from one introductory offer to another, leaving before the higher rate kicks in. While this may sound clever, it can be a risky strategy. You’ll need to be very diligent in understanding a lender’s terms on different balance types, activities and commitment terms, as lenders don’t want you to do this and are making it harder and harder to do so.
Once you have credit in place, make sure you monitor how it’s being used.
As identify theft and credit card fraud continue to escalate, be on the lookout for unauthorized purchases, application approvals or denials you did not request, or applications submitted in your name. Always sign your cards (or write “please see ID” on the signature line), don’t give out card or account information over the phone and work with your lender to safeguard your accounts.
We want you to have a balanced financial life with the ability to save for the things that matter — like your retirement — while moving ahead with the things you want. Credit can be an extremely useful tool when things are tight or you’re ready to make a big purchase. If you plan ahead and factor in the interest charges and fees, credit can be an important tool that can help you do more with what you have.
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