May 18


The Basics of Credit as Explained by August Funding

Some people think they can live on cash alone but that couldn’t be further from the truth. Since credit is so widely used, it’s almost impossible not to have credit. But if you’re one of those people who’s never owned a credit card or established a repayment history, then this guide is for you.

There are some people who are strictly opposed to owning a credit card. Those people are proud of having no debt. But then, eventually, they realize how much harder it is to borrow money when they need it. This guide by August Funding will show you why you need credit, what determines your credit score, and how to maintain good credit.

Why You Need Credit

Everything is easily accessible at your fingertips with modern consumerism. You can order an item online and have it arrive at your front door within a few days. It’s making it harder for people to save money. The average personal savings rate has fallen to 5.4% from its all-time high of 14.6% in 1975, according to the U.S. Bureau of Economic Analysis.

People need credit more than ever to afford the expensive items and some of the smaller things in life. While your parents saved up money to buy cars, furniture, and vacations, credit cards make it easier to afford these luxuries. That’s in addition to the car loans, mortgages, personal loans, and student loans that people already use for borrowing. When you combine your need to have these things with reducing savings, it makes sense why you may need credit.

Who Determines Your Credit?

As August Funding notes, there are five major factors that determine your credit score or credit rating. Each of these factors accounts for a percentage of your credit score. The following five factors include:

Amounts Owed
Length of Credit History
New Credit
Payment History
Types of Credit

Your credit score can range from 300 to 850, with 300 being the worst and 850 being the best. Your overall credit history goes back to 7 years of credit activity or the past 84 months of data reported to credit bureaus. Bankruptcies can be reported up to 10 years after the debt has been released. You can order a free credit report from one of the three major credit bureaus once every year.

While your payment history determines your credit score, other factors can also drag down your credit score. It doesn’t matter if you meet the monthly minimum payment requirements.

Maintaining high balances, having too many credit cards, and relying on this unsecured debt can cause your credit score to plummet. Not to mention, it can lead to higher interest rates and impact your financial stability. You may even experience a higher monthly payment because of this.

You should never rely on credit cards to help pay off your debts. The Federal Reserve Bank of New York found that the household debt rate rose to $32 billion in 2018 and it’s likely to increase. Relying on credit cards to get you out of debt or bankruptcy will make your credit score worse rather than better.

Advantages of Owning a Credit Card

Aside from providing a use for credit, there are several advantages to using credit cards. One of the biggest advantages are rewards and sign-up bonuses. As your need for credit increases, so does your chances of receiving rewards and bonuses. Credit card companies are coming up with ways to entice consumers with attractive rewards programs. Among some of those lures are APR’s as low as 0%, cash back rewards and freebies.

Since the rewards are applied to your account immediately, it provides a sense of instant gratification. But since that interest doesn’t accrue for several weeks, you can get paid for simply using your credit. This only benefits you if you pay off the entire balance on your credit card each month.

Other advantages include consumer protection and insurance coverage. Some credit card companies partner up with insurance providers to offer insurance on big purchases such as car rental and travel. Some credit cards also offer protection against fraud or extensions on the manufacturers’ warranties depending on the products you buy. Credit cards handle fraud quickly and easily, unlike most banks.

How to Get Credit

While getting credit is easier than ever, convincing a bank to provide you a line of credit or mortgage is harder than ever. Banks are finding ways to offer different credit options, but they’re still not willing to take a chance on consumers. In order to get approved for these big-ticket items, you need to prove that you’re a responsible credit consumer.

This starts by purchasing smaller credit products and having a proven history of paying your credit cards on time. Credit card companies are more willing to give consumers a chance, which is why there are so many credit cards to choose from. But how do you know which one to choose?

Choosing the Right Credit Card

There are many different rewards programs out there. Whether you’re looking for cash back, freebies, or travel expenses, there’s a program that will fulfill your needs. Don’t assume every rewards program will provide you with what you need. Each rewards program has different fees and restrictions associated with it.

August Funding notes that travel rewards programs are the most generous ones you’ll ever find. That has been the case since credit card companies are faced with increased competition. Keep in mind that the better and more flexible the rewards, the higher the interest rate on the credit card is likely to be. It’s important to review the fine print and rules of the program you’re interested in before jumping into it.

Each credit card company also has its own requirements on the minimum payment that must be paid each month. This is an important factor to consider if you plan to carry over a balance on your card from month to month. One card may be tempting with its low-interest rates, but if you do a balance transfer, you may be hit with a hefty fee. You want to make sure you satisfy the monthly minimum payment.

Other factors to consider include fees and the grace period. Fees can vary from one card to the next. Some credit cards have zero fees while others cost hundreds of dollars each year.

Remember, the better the rewards program, the higher the interest rate. In addition, some credit cards will charge interest from the minute that you make a purchase, which is known as the grace period.

Ideally, you should pay off your balance every 20 to 30 days to avoid the fees and interest rate. Make sure that your credit card’s grace period aligns with your needs.

How to Keep Your Credit in Good Standing

Once you choose a credit card, it’s important to keep it in good standing. A poor credit rating can make it impossible to borrow from banks and results in higher interest rates and fees. Having poor credit can also make it impossible to make big purchases, such as a new car, or affect your ability to rent an apartment. But there are several ways that you can maintain your credit score.

Always pay your bills on time. Missing a payment can result in a higher interest rate. A series of late payments can lead to your utilities being discontinued. Also, don’t overuse your credit card for more than you intended. Using your credit card too much and not keeping up with those monthly payments will make you look untrustworthy in the banks’ eyes.

Keep at Least One Credit Card

The best way to maintain your credit rating is to apply for one credit card — and one credit card only. While some people assume that if you never have a credit card then you’ll never have a poor credit rating, this is untrue. The only way you can prove to a bank that you’re trustworthy is borrowing money responsibly. If you don’t get tempted by too many credit card offers, then your credit score will remain in good standing.

This guide should provide you with a better understanding of credit and how it impacts your credit history. It’s more important to have a credit history in order to borrow money, make large purchases, and to buy or rent a home. By keeping up with the credit industry and being responsible for your payments and purchases, you should have a positive credit score.


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