After finishing up your studies, there will only be one grade that you will be worrying about: your credit score. You may have heard about the terms “good and bad credit,” “credit card,” and “credit scores.” These terms may all be very familiar but they can be a little bit confusing if you are not knowledgeable about them. They may exist in the virtual world and may not come to you in real life but credit is a critical factor that affects each and every adult. It is a great idea to learn what it is and how it affects you now, and how it could affect your future.
Why Is Credit Important?
Credit is usually borrowed money that you can use to make a purchase like home repairs, a vacation, or a vehicle. You will have to pay the lender back the full amount borrowed with an additional fee. Every borrower needs to have a credit history which will be the basis for lenders to decide to extend credit to you.
Credit is important to a person who wants to achieve goals such as buying a home or obtaining a credit card. Most banks and credit institutions will look at a person’s credit scores to determine if they should allow him to get a loan or not. You must take care of your credit history and be good at managing your credit score because it can have a huge impact in your life.
What Is A Credit Score?
Each of us has our own history of financial activities that is summed up to an overall score. Credit institutions keep all the records of every person’s payment history, the number of credit cards a person has, and how much debt you have accumulated throughout your life. Based on these factors, a number will be generated by credit bureaus which will be used by lenders to calculate the risk of lending a person money. With the various formulas used to compute a credit score, it is critical for a borrower to know all that is taken into consideration.
How Do I Establish Credit?
A person must practice good financial habits to help establish his credit history. Start by making your purchases smaller and paying them on time. Payment history is an important part of an individual’s credit history. Credit institutions keep a close watch on their borrowers whether they pay their bills on time or not. If there is a limit given to your card, never exceed this credit limit. Lastly, you must only apply for credit cards that you can afford to maintain because every new credit card can affect your credit score.
How To Review Credit Reports?
There are easy ways for you to monitor your credit report. Each year the law allows you to check your credit report from each of the credit bureaus at a website called annualcreditreport.com. Always check your report for mistakes including late payments, your personal information, and the transactions you made on that year. Most changes shown on credit reports usually take a month before it is updated. Schedule reminders for your monthly dues or try using automated payments to avoid late billings.
Where Do Credit Rewards Come From?
Most credit card companies provide travel and cash incentives if you make the necessary purchases. These rewards come from the interchange fees. Interchange fees are the payments made by a bank to another bank when a borrower uses a credit card to make a purchase. These fees vary depending on the banks, but usually they are at 2% or more. This rate is enough to cover all the reward rates of a competitive rewards credit card.
Some even have rewards that reach 6% to 7% on specific kinds of purchases. But take note that most of them usually are capped with a certain annual amount. If your credit card offers a reward that is too good compared to the usual interchange fees, verify your benefits statement immediately for rules on spending limits.
Which Fees will be Charged?
There are various credit card fees that you may need to pay. Most of them can easily be avoided if you know what you are doing. Some of the most common fees are:
- Annual Fees – This is charged on almost all secured and unsecured credit cards. Annual fees are usually charged on high interest credit cards. You can avoid annual fees by applying for a card that openly does not charge this. But if you are a big spender getting a card with annual fees will earn you bigger rewards.
- Balance Transfer Fees – This is charged when you move balances from one credit card to another. The fee is usually 2% to 4% of the transferred balance. This fee is usually given to a person with credit card balances who found a better bank with an APR of 0%. Transfer fees should only be paid if the interest a person would pay on their current credit card is greater than the balance transfer fee to be paid.
- Foreign Transaction Fees – This fee is charged every time a borrower makes a purchase out of the country. Foreign transaction fees usually come at 2% to 4% depending on the price of the purchase. In order to avoid paying this fee, you can acquire a credit card that features no foreign transaction fees.
- Late Payment Fees – This fee is charged to a borrower if they are unable to pay the minimum amount on the due date stated on the credit card statement. Always remember to pay bills on time to avoid this fee.
- Over The Limit Fees – This fee is charged if a borrower exceeds the allowable credit limit given to him. A borrower has the choice to opt in to this fee. Always keep in mind that if you chose to opt out of this fee, the cashier will reject all of your purchases once your credit card reaches its credit limit.