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Introduction to Credit

Credit can be very helpful when used in the right way. It can help you make big purchases, like buying a home or a car. It can also be used to pay for education.

Using credit can be convenient, allowing you to make large purchases you don’t have the savings for. But credit can build up debt that can get out of control when you don’t manage it closely or if you spend too much. You can help yourself by:

  • Limiting the amount of credit you have (credit cards, store financing, etc.)
  • If something feels like an impulse purchase, wait for a day or two to buy the item. Studies show that people are less likely to make “unnecessary” purchases if they have to return to the store a second time to buy them.

Paying for the Unexpected

Sometimes you need to use credit for the unexpected. Short-term credit used to pay for unexpected medical bills, high utility bills, home repairs, or other family expenses, is a particularly tricky thing to manage. Often these expenses are unavoidable. If you don’t have the money available, can’t get it through a payroll advance from your employer, or from friends or family, you may need to use credit cards or even payday lenders. The best thing to do in these situations is to fully understand the terms of the credit (interest rate and other charges), and make paying this debt a priority.

Staying out of trouble

Sometimes people can get in trouble with credit. The main problems are:

  1. Spending money you don’t have. If you spend on credit, it can feel like you are getting things for free. This can be very dangerous, because you will have to pay back what you spend. Make sure whenever you spend on credit that you are doing it for a good reason.
  2. Fees and interest. When someone lends you money, it must be paid back with interest. Interest is the cost of borrowing money. Also, if you miss payments you will be charged late fees.
  3. Bad credit history. If you are late with payments and miss payments, you will develop a bad credit history. This information shows up on your credit report. If you have a bad credit history, you will probably pay higher interest on loans. In some cases you won’t be able to get credit. Your credit history can affect your ability to get an apartment, buy a car or a home, get student loans, and even affect your ability to get a job.