Credit Ignorance Costs You – Credit 101

Credit Ignorance Costs Credit 101

From the first time you ever apply for credit, you begin to establish a credit rating.

Those of us who have used credit cards and have borrowed money for various purposes over the years probably have a significant amount of credit history built up. Hopefully it’s good history.

Here are some things to be mindful of when it comes to credit:

  • Credit is your ability to obtain goods and services before a payment is made in exchange for a commitment. The payment will be made in the future.
  • Credit may mean there is no requirement to make a complete, full payment for the goods or services you receive before a particular date.
  • Your ability to manage credit can help you achieve your financial goals or cause financial ruin.

Here is my take on credit:

1. Using credit to buy small-ticket items (items that cost less than $5,000) can be good, as long as you do not incur fees to do so.

Personal example: I use my credit card(s) for every small purchase I make, but I pay the credit card balance in full every month.

2. Using credit to buy medium-ticket items (items that cost more than $5,001 but less than $50,000) is OK, as long as you incur minimal fees to do so.

Personal example: We needed a new roof on our home a few years ago and decided to use a personal line of credit for this expense. The cost to us was about 4 percent during 14 months.

“You can simplify your credit life

if you don’t borrow money often.”

3. Using credit to buy depreciating assets (like a car or a computer) and paying fees to do so is not very smart.

Personal example: Although we bought a new car recently, it was close to zero percent financing. Our other car, my car is a 2000 Mazda Protégé, I intend to drive for a few more years.

4. Using credit to buy large-ticket items (items that cost more than $50,001 like a house) is largely unavoidable without credit, so it is important to keep your fees low.

Personal example: We have a sizable mortgage. Because of that, we are saving diligently to pay it off. Hopefully we can do that in another eight years if things go to plan and live debt-free.

Some credit rules of thumb:

  • Before you use credit, make sure you know how you are going to pay the money back.
  • Making payments on any credit balance is a good thing.
  • Paying all your bills before the due date is a great thing.
  • Avoiding any unnecessary credit is an excellent thing.

The cost of credit depends on a number of factors: how much you borrow, for how long and what rate is charged to you over time. Ultimately, you can simplify your credit life if you do not borrow money very often and you do not borrow money for very long.

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