By Lynesha McElveen
What is Credit? What’s the difference between credit cards and charge cards? What is a Beacon and FICO Score? How do I wisely build credit? What is the best way to manage debt? What works best for reducing debt quickly? How many credit cards should I have? Should I pay my balance in full monthly, or leave a balance? How much of my credit should I use? All of these are questions that many have, but don’t know the answers to…so let’s start by answering some.
- First let’s start out explaining what is credit? Credit is a lenders decision to extend an opportunity to “buy on time.” With credit you can purchase an item today and pay for it by making payments over an extended amount of time.
- While a credit card charges interest and can be paid over an extended amount of time, i.e. VISA, Master card, a charge card charges no interest and must be paid in full each month, i.e. AMEX.
- A Beacon or FICO score also known as a “Credit Score” is a score generated by the 3 major credit bureaus based on the 4 Cs. Credit-How well you’ve paid past obligations, Character-Your stability and how successfully you’ve maintained accounts, Capacity-Your ability to repay based on income, and Collateral-What you own. This score determines the interest rate and types of funding you may qualify for.
- You can build credit by applying for credit cards, taking out secured lines of credit at a local bank, paying obligations before the due date, and making the minimum payment consistently each month.
- Manage debt by paying all obligations timely, even if you can only pay the minimum due. Don’t skip payments and think doubling up is the answer. It will only lower your score.
- Reduce debt by paying off the card with the highest interest rate first. Then take the money you used on the 1st card and apply it to the card with the 2nd highest rate, and so on and so forth.
- Try to have 3 lines of credit, and no more than 2 credit cards. Some of these lines can be revolving debt, i.e. car loan, student loans, or personal loans.
- Paying off the full balance of a credit card each month will ensure you don’t pay any interest or get into debt. Don’t spend more than you can pay each month.
- Try not to use more than 50% of your credit. Anything more than this will negatively impact your score. For the best score, use no more than 10% of your available credit.
I hope this answers many of your credit questions. Good luck and happy credit building!
