Education

    Using Credit

    Using Credit

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    Using Credit

    Borrowing money may make it possible to afford things that you couldn’t otherwise, but make sure you understand what you’re signing up for to avoid falling into overwhelming debt.

    Paying it Back

    Let’s be clear right from the beginning: when you pay for something with credit, you’re still on the hook for that money. Often, you’ll have to pay back even more because of interest. The type of credit you use and the specifics of the agreement will determine how much interest you’ll have to pay, the size and frequency of your payments, and more.

    It’s extremely important to recognize that using credit can be risky. If you borrow too much or at too high of an interest rate, you can end up owing more than something is worth or being in a position where you’re struggling to pay back everything you borrowed.

    2 Types of Credit

    There are two types of credit that you’ll interact with most often:

    Revolving credit is a type of credit where you can borrow, pay off, and borrow again up to a predefined amount of money and in some cases a predefined term. At regular intervals (usually monthly), you’ll need to make a payment. If you don’t pay off what you borrowed completely on a monthly basis, the unpaid amount will carry over to the next billing cycle and begin accruing interest. The most common examples of revolving credit are credit cards and Home Equity Lines of Credit HELOCs.

    Installment credit is a type of credit where you borrow an amount of money all at once and pay it back in predetermined payments or installments. These regular payments could last for only a few months or multiple years. Most loans are examples of installment credit, so that would include personal loans, car loans, and mortgages.

    Common Credit Terms

    To be an informed credit user, you’ll need to understand these vocab terms.

    • Annual Fee - A fee charged every year.
    • Credit Limit - The total amount you can borrow when using revolving credit.
    • Credit Score - A number between 300 and 850 meant to show lenders how you pay back your credit
    • Default - When you don’t pay what’s owed on a debt. Down Payment - An amount of money you pay upfront when taking out a loan Your down payment will go toward the cost of the item and lower the amount of money you have to borrow.
    • Finance Charge - A fee charged for the use of credit. One of the most common types of finance charges is interest.
    • Grace Period - The amount of time you have to pay your monthly payment without a late fee after the payment due date.  For example, if your car loan is due on the 1st day of the month and you have a grace period of 10 days; you won’t be charged a late fee until the 11th day. Interest Rate - An interest rate is the percentage of principal charged by the lender for the use of its money. Interest rates affect the cost of loans. The interest rate can be fixed, meaning it stays the same, or variable, meaning it changes with the market.
    • Minimum Payment - The lowest monthly amount you can pay back Principal - The amount initially borrowed for a loan.
    • Term - The length of time you have to pay back the money borrowed and interest accrued on a loan.

    Tips for Using Credit

    These tips can help keep you out of trouble:

    1. When you can, pay your revolving debt in full monthly; you may avoid paying interest.
    2. Pay more than your minimum on loan payments.  You may pay it off faster and pay less in interest (but be aware, some loans have early payoff penalties).
    3. Try to put money down when buying large items like a house or car. How you use credit will have a big impact on your life. Good credit—where you use credit wisely and follow the steps above—can allow you to buy things you couldn’t get otherwise, or may be at a lower interest rate. Bad credit—where you spend more than you can afford to pay back—will affect your ability to borrow in the future.

    CSB offers revolving credit in the form of credit cards and home equity lines of credit and installment credit types for auto, personal and mortgage loans. Apply online, 24 hours a day.