Credit is a convenience. It allows you to enjoy a purchase while you're paying for it or to make a purchase when you're lacking cash. But always remember that there are strings attached.
Credit transactions are protected by a variety of laws. Consumers need to know and understand these laws, but they also need to use credit wisely.Here are some tips from the Federal Reserve Board and the American Express Company on using credit:
- Before you think of borrowing or opening a credit account, figure out how much it will cost and whether you can afford it. Then shop around for the best deals.
- Two terms are important. The finance charge is the total dollar amount you pay to use credit. It includes interest costs and other costs, such as service charges or credit-related insurance premiums. The annual percentage rate (APR) is the percentage cost of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it.
- When you are shopping for an open-end credit plan (such as a credit card), the APR you're told represents only the periodic rate that you will be charged. Annual membership fees, transaction charges and points are not included in the APR. Keep this in mind and compare all the costs, not just the APR.
- If a family member or friend co-signs a credit card with you, you are both responsible for any purchases charged to the card by either one of you.
- Watch out for special enticements to sign up for a credit card. The benefit may be short-lived or one-time-only. Evaluate all offers carefully before you apply and then select a card with the terms that will benefit you over time.
- Every time you use credit you are adding to your credit history. Your credit report shows how much available credit you have on all you cards, how large your outstanding balances are, how promptly you pay your bills and any legal actions taken against you to collect a debt. You can request a copy of your credit report from a credit bureau.
- Keep a list of your credit card numbers in a secure place. The list should include the name and phone number of each card issuer. Report lost or stolen cards immediately.
- Credit cards have limits; know yours. Going over the limit can be expensive. Many cards have over-the-limit fees, some as high as $15. Don't be fooled by approval to go over your limit when you make a particular purchase. It is up to you to be aware of how much available credit you have.
- Many banks charge a transaction fee as well as interest on a cash advance. There is usually no grace period, so the interest accrues as soon as you receive the cash.
- Minimum monthly payments are useful if you cannot pay off any more than a small amount, but beware. Interest charges can add up dramatically over time.
- When you move to a new address, inform your creditors immediately of your new address. Your bills may not catch up with you in a timely fashion and you could run up interest charges or even be reported as delinquent in your payment on your credit report.
- If you find that you have borrowed more than you can afford, contact your creditors and try to work out a payment plan. Before you talk with them, carefully figure out how much you can really afford to pay each month so you don't make promises you can't keep.