Debt Management The Benefits and Drawbacks of Credit.
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Transcript of Debt Management The Benefits and Drawbacks of Credit.
Debt Management
The Benefits and Drawbacks of Credit
The Role of Credit
• “Credit is a poor man’s best friend”• Credit is a useful tool that enables consumers to make
large purchases without the assets or cash on hand.– Cars, houses, electronics, ect.
• Credit rating/ score rates the level of risk you are to a lender– 300 to 850 points– Managed by FICO – Your score determines the interest rate and likelyhood of
receiving a loan or a credit card
Understanding Your Score
• The breakdown of credit score ranges is as follows: <630: Bad credit– You likely landed her because of bankruptcy, or because you’ve missed payments
consistently—or, as is often the case with younger folks, you have no credit history at all. You’ll face higher interest rates and fees, and your choice of credit card is restricted. If you find yourself in this bracket and still want a credit card, a secured card is likely your best bet.
• 630-689: Fair (average) credit– Your score is average, and it’s probably because you have too much “bad” debt. If
you’re holding onto some credit card debt or if your balance often grazes your credit limit, bureaus won’t trust you, and therefore lenders won’t either.
• 690-719: Good credit– Your rates are low, and you can choose from most cards, including those that earn
rewards.• 720-850: Excellent
– If you’re in this bracket, take a look at cards with great fringe benefits. American Express, for example, offers premium cards that better accommodate the ritzy life.
Interest is a Cost
APR• Annual Percentage Rate • Your principle times the rate
you received calculate at a yearly rate
Compound• A hidden Cost• Your APR is typically divided
by the days in the year.• So every day the interest
applied to your principle compound on the existing interest.
• These are especially damaging with credit cards because the APR’s are usually higher.
How to Diminish the Impact of Interest and Increase Your FICO Score
• To lower the impacts of Compound Interest always pay more than the minimum.– Anything you pay over the minimum is applied to the
principle– Thus it lowers the amount of interest that is applied
annually and the amount that is compounded daily• To maintain a good score you need– Establish credit– Pay your bills on time– Do not over rely on credit– Do open too many accounts