In Hamlet, a father tells his son: “Neither a borrower nor a lender be.” While that concept sounds great in theory, it’s virtually impossible to stick to – especially on the borrower side of the equation.
Credit has become a routine part of everyday life, as we often rely on credit cards and loans for both necessities such as food and gas, and luxuries like vacations and shopping sprees. The key is to understand how credit operates and how to use it to your advantage.
Even with increasingly stringent approval requirements, credit and credit cards are still relatively available – and quite tempting if you’re a college student with limited access to funds or a new graduate with a starting salary that doesn’t exactly match your lifestyle vision.
The problem is that credit use often turns into credit abuse. And the consequences of credit abuse goes beyond the obvious inconvenience of nonstop bills and collection calls. Your credit history can open – or close – the door to opportunities. Aside from affecting your ability to get an apartment or take out a loan, credit histories are now increasingly used by companies to assess job applicants.
So how do you enjoy the benefits of borrowing without being saddled with negative baggage? Just keep a close eye on your B.U.C.K.S.
Distinguish between “good” credit and “bad.” Good means borrowing for a purpose that cannot be funded with cash — ideally for an investment in the future. Borrowing (within reason) to pay for college is a prime example, as people with college degrees often earn more. Bad credit involves borrowing for things you don’t need or don’t increase in value. For example, using credit and paying 15 or 20% interest for one night of table service at a popular nightclub is a “bad” way to borrow.
In searching for a loan, look for the lowest annual percentage rate. APR adds any related fees to the loan’s basic interest rate to show what the loan will actually cost you over a year.
If you carry a balance routinely, or use one credit card to pay off another, you’re in trouble. Use a debt-reduction calculator to come up with a strategy for getting out of it. At least make the minimum payment, and to pay the debt off as quickly as possible, start with accounts that charge the most interest.
Having and using a credit card will allow you to build a good credit history and credit rating, so you’ll be able to get loans in the future (for big ticket purchases like a new car or a home) and at the lowest interest rates available. Credit scores range from 300 to 850, with higher numbers meaning a better ranking. Strive to get your credit score above 750. To build a good credit history, pay all your loans and bills on time. Ideally, credit card balances should be paid in full every month, allowing you to avoid interest and penalties. Go to annualcreditreport.com to get a free copy of your credit report.
Develop a habit of savings so that you’re not tempted to abuse your credit in a crunch. Also, the more cash that you have available, the better terms you can negotiate when you need to use credit for major purchases. For instance, you can get a lower interest rate on a home mortgage loan if you have at least a 20 percent cash down payment.