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Credit Information

May 9, 2009

TOPICS OF THE ARTICLE

• Establishing Credit
• Secured Cards
• Choosing a Card
• Use Credit - Have More Cash
• Balances: Pay More - Pay Less
• Consolidating & Refinancing
• Credit Reports

Credit is a strange animal. It’s good to have it, of course - but using it can get you in trouble if you’re not careful, and it’s not good to have too much of it. On the other hand, if you use your credit wisely, you can actually get more for your money and also build a credit history to help you get a morgage easier without having to apply for a bad credit mortgage.

ESTABLISHING CREDIT

Getting credit is more or less a catch-22: if you have good credit, people will offer you more credit, and if you don’t, they won’t. So aside from the occasional table in a university student center featuring cards with low credit limits and high interest rates, you shouldn’t expect to get many offers of credit until you’ve bought something on credit.

The good news is that buying something on credit does not necessarily mean buying something with a credit card. If you purchase something on an installment or rent to own plan, you will be subjected to a credit check, typically confirming your income and ability to make payments. If you make all the payments and purchase the item, you’ll be on your way to a favorable credit rating.

CHOOSING A CARD

Sooner or later, you will - at least I hope you will - get to the point where your credit’s good enough that people start sending you offers for cards. Obviously, not all cards are created equal. A few points to consider:
1. Are there any fees simply for having the card? How high are they?
2. What’s the interest rate? If there’s an introductory rate, how long does it last, and afterward, what does the rate become?
3. Does the card offer any cash back on purchases?
4. Does the card offer any special security features, like your photo on the front?
5. Does the card offer special benefits? Most platinum cards offer travel insurance, and using some “affinity” cards will earn you frequent flier miles, or discounts on auto purchases.

Various sites offer comparisons of credit cards, and the range of features and rates is well worth reading about.

USE CREDIT - HAVE A BIT MORE CASH

If you use a credit card carefully, you’ll end up with more money. Let me elaborate on that. If you pay cash for various purchases over the course of a month, you gradually deplete the amount of cash you have (which I hope is sitting in the bank earning you interest). On the other hand, if you use a credit card, the cash can sit there and earn interest until the check you send the card issuer clears. Naturally, this presumes that you’re paying off the card in full every month.

BALANCES: PAY MORE - PAY LESS

If you’re not paying off your balance every month - and I know how that feels! - you’ll still want to keep some cash in the bank for rainy days and emergencies, but you’ll save money by throwing as much as you can afford at the card issuers.

Yes, I said that. The more you pay, the more you’ll save. No, this isn’t “the new maths.” Basically, the more you pay, the less interest builds up. If you just make the minimum monthly payments on a credit card balance of a few thousand pounds or more, you’ll take 20 years to pay it all off - and you’ll end up paying more in interest than you originally spent!
On the other hand, if you pay double the minimum, you’ll be paid up several years sooner, and save thousands of pounds in interest. And if you can pay a higher multiple, you’ll be done even sooner and save even more. This is, of course, a good thing - though it’s better still to pay things off in full each month!

CONSOLIDATING & REFINANCING

If you’re following any of the advice above, you probably won’t find yourself allocating too much of your non-discretionary income to credit payments. (Discretionary income, on the other hand…) But if you’ve got a whole bunch of different accounts, each with its own balance, interest rate and minimum payment, well, life’s no fun.
Consolidating and refinancing to the rescue! In either of these cases, you replace all your little high-interest debts with one big low-interest one. If the new interest rate is significantly lower than the old ones, you can save a decent amount of interest expense.

Consolidation or refinancing loans come in two flavours, just like credit cards. There are secured loans, where you put something up as collateral (like your house, or your car) and your new creditor gets that something if you fail to pay off the loan. And there are unsecured loans, where you are given the loan on the basis of your word (and your credit rating).
Unsecured loans tend to have higher interest rates than secured ones, so if you’re paying more than the minimum on your credit cards, consolidating them might not be as beneficial as you hope. A bank loan rate officer should be able to tell you whether it’s worth it. Various web sites also offer debt consolidation loans and information.

CREDIT REPORTS

I recommend looking at a copy of your credit report every few years, just to make sure things are correct and accurate - and preferably positive! Credit reports are available from credit reporting agencies online and generally cost several pounds.

Credit reports are available on-line through web sites. These sites usually offer credit monitoring services which regularly updates subscribers on the state of their credit reports. A free credit report or analysis and trial period are typically offered - if your report is totally positive and you don’t think it needs watching, cancel the service before the end of the trial period. If your report has some inaccuracies, or other things you want to keep an eye on, the service might be worth keeping. 

SUMMARY

• Establishing credit generally costs money.
• You can use this money to buy something on the installment plan, or to get a secured credit card.
• Not all cards are created equal. Choose carefully.
• Used carefully, credit will help your make money last.
• Paying as much of your balance as you can will save you money long-term. • Consolidating debt through a loan from a bank or a web site can help lower your interest rate, but you may have to post something of value as collateral to get a good interest rate.
• Credit reports can be very informative, and they can be had for free.
• Credit monitoring services may be useful if you’re unsure about your credit report.

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