Credit: Friend or Foe?

"Cash was tight, but I had a wallet full of credit cards. Before long, the accounts were up to their limits and the monthly payments were too big for me to manage."

" Buy now, pay later" is the American way. Credit allows you to have and use the things you want and need, even if you do not have the cash right then and there to cover their cost. Credit makes it possible to own a house, drive a car and get a college education even if you're not rich. With a mortgage, a car loan or an education loan, you can pay for these things in smaller amounts over a longer period of time instead of paying for the whole thing at the time you buy.

When you depend too much on credit, though, its benefits quickly turn into dangers. The result of using credit is debt: money that you owe to a creditor, which may be a credit card issuer, a bank or a finance company. Not only does the creditor expect you to repay the amount you borrowed, you also have to pay finance charges. A finance charge is the dollar amount the credit cost you. If you rely on credit too often, you might soon find yourself over your head in debt.

Your Credit History

"I'm a good person. Why do I keep getting turned down for a credit card?"

Before creditors will extend you credit, they want some confidence you will be able to repay them. To determine whether they should extend you credit, creditors consider factors such as your income, how long you have lived in the same place and had the same job, what you own, how much you owe to other creditors, how many credit cards you have, whether you have ever had a legal judgement against you and whether you pay your bills on time.

Your Credit Score

The information in your credit history is used to create your credit score, a three digit number that shows how likely you are to pay your debts, based on statistics of how millions of other people pay their debts. The higher your score, the more likely you are to be a good credit risk for a creditor. For example, FICO credit scores, which are produced by Fair Isaac and Co. and used by more than 70 of the nation's 100 largest financial institutions, range from the 300's to about 850. Usually you need a score at least in the low 600's to get a mortgage. Some companies charge lower interest rates to people with high scores.

Bad Credit Hurts

People may also want to check your credit history before they give you a job, a lease on an apartment or a house, a bank account, telephone service or an insurance policy. If your score is too low, you may not get what you want or you may be asked to pay more for it.