With $11.4 trillion dollars of consumer debt in the United States, it’s no surprise that American consumers use credit to purchase just about anything.
As a consumer, whether you are looking for a credit card with a good interest rate, options for a mortgage loan or trying to figure out how to pay for college, it’s imperative that you understand how credit works and how to navigate, manage and improve your credit.
Think of your credit score as the blood pressure of your financial health. It’s a number that summarizes an assessment of how you manage money, and it’s what lenders use to determine if they will lend to you, interest rates and credit limit.
You can obtain a free credit report, though your credit score will not be included. You will have to pay one of the three agencies to obtain your score: Equifax, Experian and TransUnion.
Credit score grades and rankings, according to the North Carolina Department of State Treasurer are as follows:
- Excellent: Over 750
- Very Good: 720 or more
- Acceptable: 660 to 720
- Uncertain: 620 to 660
- Risky: less than 620
It’s also helpful to know how the score is calculated: 35 percent is based on your payment history, 30 percent is based on what you currently owe to lenders, 15 percent is based on the length (in regard to time) of your credit history, 10 percent is based on new credit accounts or inquiries, and the final 10 percent is based on the types of credit accounts you currently hold.
The Importance of Good Credit
Having a good credit score means lenders will be willing to provide you with lower rates if you need help financing a car or securing a mortgage loan.
It will also make it easier to be approved for renting a home and will allow you higher credit limits, giving you flexibility with your finances. Also, be aware that some employers check credit scores as part of the hiring process.
Improving credit isn't overly complicated, it just takes patience and a willingness to stick to a plan.
Make a budget for yourself or your household, and follow it. Monitor your spending, and make it simple.
Choosing a credit card is similar to deciding where to go to college or shopping for your first house; it’s an important decision that can greatly impact you going forward in life.
To minimize negative impact of credit cards and to amplify the positives, be willing to research and shop around. Being well educated about credit cards and their pros and cons can help you select the one that best suits your needs as a consumer.
Marquita Robertson, financial education director for the Office of the State Treasurer of North Carolina, echoes the sentiment of being careful with credit.
"Consumers don’t always get this, but credit is a loan and must be repaid," Robertson explained. "Before getting any type of loan, ask yourself if you really need to make this purchase or does it make sense to postpone and save the money to buy it outright."
One of the first things to consider when choosing a credit card is your spending habits.
Are you someone who wants to pay off the bill every month? Or are you more likely to carry a balance?
Even simple questions like these are important to ask yourself, because the answers will help you make wise decisions.
For example, if you are someone who will pay the balance monthly, a high interest rate won’t really affect you. You can look for a card with low or no annual fees.
However if you are someone likely to carry a balance, look for the lowest interest rate (APR) you can find.
"Ideally, we encourage people to pay off credit cards each month but realize that sometimes that is not possible," said Sandy Wheat, executive director of the North Carolina Council on Economic Education. "When taking on credit card debt, it is important to avoid charging anything that cannot be repaid within three months."
A few other tips regarding spending habits:
- If this will be the card you use for most purchases, shop for a strong rewards program.
- If this is a backup or emergency card, shop for the lowest rates you can find and don’t worry about rewards programs or other perks.
The best option, in regard to credit limit, is finding a company willing to offer you a credit limit that allows you flexibility in spending without so much freedom that you can find yourself in too deep a hole.
College students often start with lower credit limits as they learn to use credit, and as they graduate and move into the professional realm, their credit limits increase to keep up with larger expenses.
The best advice is to know yourself when it comes to credit limit. If you’ve struggled with finances or responsibility, it might be wise to agree on a lower limit.
On the other hand, if you can handle having a higher limit, that can prove helpful since spending a low percentage of your credit limit increases your credit score.
Fees and Penalties
The consumer is how credit card companies make money, so it’s no surprise there are numerous ways for them to do so. Interest rates and annual fees are easier to spot when card shopping, but many cardholders are caught off guard by other fees, including:
- Transaction fees for anything ranging from balance transfers to asking for a credit limit increase, or even making payments over the phone or online.
- Late fees themselves aren’t a surprise, but their severity can be a shock to customers who were unaware.
- Exceeding your credit limit usually won’t get your card declined -- it will just get another high fee added to your balance, so you owe even more money.
A final piece of advice: when selecting a card, be prepared for your situation to change.
If you don't plan to carry a balance, it’s still possible that there will be a few months down the road when you’ll need to, or when you can’t afford a minimum payment. This is when it helps to have already selected a card that best suits your needs now and can serve you as well as possible in all of your financial situations.
This story was written for our sponsor, North Carolina Department of Public Instruction.