When to Use Credit (and When to Avoid It)

person holding credit card and using a laptopIf used carefully, credit can be a helpful financial tool. For example, using credit to purchase a home now, rather than trying to save up the whole purchase price, makes financial sense. The home provides a place to live that will perhaps increase in value and the mortgage interest offers a tax deduction. Credit may also help you deal promptly with costly emergencies.

Many consumers turn to credit when faced with unexpected home or auto repairs, as well as medical emergencies. And credit offers convenience, enabling you to rent a car or hotel room or buy airline tickets over the phone or online. In many situations, credit offers peace of mind; there is no need to carry large amounts of cash when shopping or traveling.

Despite all the advantages and conveniences credit can provide, there are some pitfalls associated with credit use. Credit can be expensive. Interest rates (often ranging from 14% to 22%), finance charges, annual fees, and penalties can dramatically increase the cost of any purchase made on credit. Then, there is a tendency to overspend on credit. It is much easier to spend more than you can afford when all you have to do is pull out the plastic. Over-extension gets thousands of consumers into financial trouble every year.

It is possible to have the best of both worlds, though. Designing a realistic spending and savings plan so you are aware of how much credit you can afford, as well as comparing the cost of credit and shopping around for the best deals, will help you avoid credit trouble.

Here are a few more tips:
Keep your charge receipts in an envelope with a running total on the outside. If the total exceeds an amount you consider appropriate, you know it’s time to curtail your spending.
Save monthly for expenses such as auto maintenance, holiday gifts, and the kids’ school clothes. That way you don’t need to use credit to cover these expenses, or, if you do charge them, you can pay the balance in full when the bill arrives.
Monitor interest rates. Choose lower-rate financing options whenever possible.
Limit the number of open credit card accounts you have. You don’t need more than one or two credit cards, and it’s much easier to keep track of your total outstanding debt with just a couple of accounts.

How Much Debt Is OK?
As a rule, no more than 15% of your net (take home) income should be committed to consumer debt payments each month. Another way to determine how much debt is appropriate for you to carry is to first complete a family budget. The amount remaining after you deduct your monthly savings and living expenses from your net income is the most you should have going to debt repayment. If you’re sending more than that to your creditors each month, you may want to consider credit coaching to help you reduce your debt load.

Shopping for Credit
When shopping for a credit card, you should first decide how you plan to use it so you can compare the features that are important for you. It is important to understand the difference between a charge card and a credit card. The balance on a charge card must be paid in full every month. Paying only a portion of the bill will cause your account to be delinquent. A credit card allows you to carry a balance for as long as you want, provided you make at least the minimum monthly payment due.

If you will pay your credit card bill off every month, a low annual fee is important. If you usually carry a balance, look for the lowest interest rate. Shop for a grace period, the amount of time after your purchase during which finance charges are not assessed. Some banks and finance companies give you up to 30 “free” days, but it has to be at least 21 days. However, interest starts accruing immediately on cash advances; there is no grace period and the interest rate is higher than that applied to regular purchases.

Depending on your payment and credit use habits, you may also be affected by late and, possibly, over-limit fees.

If you have no credit or a bad credit history, you may be able to obtain a secured credit card. A secured card works just like a regular credit card except that you must leave a deposit—usually between $250 and $500—with the issuing bank as collateral. If you default on your payments, the bank takes the money owed out of your deposit.

The interest rate and annual fee on a secured card are often a bit higher than on a regular card. But a secured card can offer you the convenience of a regular credit card and the opportunity to improve your credit record. When comparing cards, try to find one that does not charge an application or processing fee and confirm with the issuing bank that they will report your payment performance to at least one of the three major credit reporting bureaus, Experian, Trans Union, and Equifax. Make the most of this chance to build an unblemished credit report!

Used with Permission. Published by BALANCE Includes copyrighted material of IMakeNews, Inc. and its suppliers.

Cut These Costs TODAY

Man buying groceriesHave you ever unexpectedly found out you’re quickly going to have less income? It’s enough to throw you into a panic. But the best way to get through hard times is to take a few deep breaths and put a plan together. Check out these common targets for quick and effective expense cuts.

Food
You might find it obvious that evenings dining out at fancy restaurants probably aren’t the best idea when experiencing a budget crunch. But think about your groceries too. Consider avoiding the higher-priced stores and stocking up on the basics at the more reasonably priced spots. You might find that cooking at home and taking your lunch to work saves you lots of money and ends up being healthier too.

Cable/Movies/Rentals
If you’re like most people, your visual entertainment comes from multiple sources. You may watch movies on cable, in the theater, via rental or online. In crisis situations, it’s best to focus on watching movies at home and using one particular way to do it. In other words, if you have both Netflix and premium movie channels, it’s probably time to go with one or the other.

Phone plans
It’s nice to use a smart phone to be able to look up information on the go, but you could probably make do without the data plan if you had to. Did you know that you could also be on a prepaid smart phone plan? Call your service provider to ask them to perform an analysis on which plan is best for you. You might be paying for more than you actually need. Also consider eliminating your house phone if you have one.

Gym
It’s important to get some stress-relieving exercise during this trying time, but there’s no reason why you should have to spend money to do it. Brainstorm ways to be active without having to fork over a big chunk of your paycheck. The main thing is to just get moving!

Shopping as entertainment
One activity that could put you in the trouble zone is shopping for fun or to ease tension. “I won’t buy anything, I’ll just browse” too often can lead you down the path of unnecessary spending. Eliminate leisure shopping or other activities that put you in temptation.

Gas
Is it an option to work from home more? Can you carpool or combine your errands into fewer trips? If your family has multiple vehicles, can you sell one and share the remaining?

Insurance
With the ease of using the Internet to compare rates, the insurance business is much more competitive than it used to be. Shop around for the best deals on any type of insurance you have—auto, home, life, etc. Check into bundling these with one company to save even more. How is your credit score? This might affect the cost of certain insurances. Also be sure to ask about discounts you might apply for, and the option of raising your deductible in exchange for a lower monthly payment.

Utilities
Think of ways to stay warm or cool more efficiently. Put on more layers in the colder months and spend more time outside during the warmer times. Be conscious of turning everything off and even unplugging electrical items when you leave a room.

Habitual items
When you have a comfortable financial situation, it’s easy to buy coffee, cigarettes, alcohol and convenience store snacks without thinking too much about it. But in these tighter times, think about what you are really getting out of these purchases and if there are expenses that are more important.

Taxes
If you have more money taken out of each of your paychecks than is necessary in order to get a large income tax refund check in the spring, you are over-paying the government each month. Cut this expense by using the IRS withholding calculator to determine the appropriate amount to have withheld from each paycheck.

None of these cost-cutting measures alone is guaranteed to immediately solve all cash flow issues, but in concert they can potentially save you hundreds of dollars per month.

Used with Permission. Published by BALANCE Includes copyrighted material of BALANCE.

How Is Your Credit Score Determined?

The importance of understanding what influences your credit score
When it comes to buying a house, purchasing a new vehicle or applying for a credit card, your credit score is bound to come into play. As an influential factor in a financial institute’s decision whether to loan you money or not, your success often rests on this mysterious number. What is this important score and how is it determined? Learning this will help you take steps to raising your score over time.

Your credit score is calculated by a combination of five different factors, each contributing a different ratio of influence. According to Stacy Smith, Senior Publish Education Specialist for Experian, it involves your payment history, utilization, length of credit history, recent activity and overall capacity.

Payment history
Certainly the most persuasive factor in determining your current credit score, your payment history tells creditors about your likelihood of paying back any loans for which you’re currently applying. Amy Fontinelle, personal financial expert writing for Investopedia, explains that consistently paying your credit card, utility bills, student loan and other bills on time month after month will produce a higher credit score that reflects your financial reliability. On the other hand, a track record of late or below-minimum payments will bring your credit score down.

Utilization
Having a credit card and consistently using it will be reflected positively on your credit score over time, but using it too much could actually harm it. According to Dana Dratch, contributor at Bankrate.com, it’s important to keep your balance below 30 percent of your limit on every credit card—both individually and total. For example, if you have a $7,500 credit limit, you don’t want the balance to exceed $1,500.

So, if you’re maxing out your credit card every month for the bonus points—even if you’re paying the bill in full each month—that probably won’t look good to creditors who may see you as constantly spending in excess or charging everything to live paycheck to paycheck. If it reaches 30 percent, proactively pay the balance on the account before continuing to charge to it.

Length of credit history
This factor is not as influential as the first two and it covers multiple territories: how long has each account been open? Are all accounts still actively used or are some being neglected? Does the applicant have a variety of accounts—credit cards, auto loans, mortgages etc? This category is tricky because it is improved over time; suddenly opening a variety of accounts and using them religiously will only hurt your score, explains Smith.

Recent activity
While a healthy credit history is important, so is the current state. If you’ve taken on a loan or opened a new line of credit in the last 6 – 12 months and are applying to do so again, you are more likely to struggle with payments than you would be to excel. This is why you should not open multiple credit accounts around the same time, advises Smith.

Overall capacity
To a minor degree, your credit card reflects how much outstanding debt you have and how that impacts your overall financial situation. If you have a low amount of outstanding debt and a healthy, steady income, you don’t have to worry about this being an issue.

How to read your credit score
Your credit score actually consists of three scores calculated by major credit bureaus Equifax, Experian and Transunion. Each number generally ranges between 300 (low end) and 850 (high end). The higher the three-digit number, the healthier your credit is.

If your credit score is lower than you need it to be, worry not. The number is recalculated often, and healthy financial habits will steadily raise it over time.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.