The Curious Case of Credit Before we delve into credit, and defining all of its nuances, I want to use this opportunity to play a clip that proves just how dangerous credit can be when used incorrectly: https://www.youtube.com/watch?v=RmGfWkuu6Zo With the jaw-dropping clip as our foundation, and through extended knowledge, we can continue to steer our financial lives in a positive direction.

Credit Cont’d So, what is credit? Credit is money that a lender makes available to a borrower, with the understanding that the borrower will repay the money (plus interest) in the future. At some point in your life, you will almost need, or want, to use credit. When everyday, or extravagant, items become too costly to save for, you may utilize credit to expedite the purchasing process.

Credit Cont’d When used properly, credit can make these purchases possible. When used incorrectly, credit can wreak havoc on your life. It is important to know the major types of credit, as well as the advantages and disadvantages of credit (as a whole). Likewise, it is equally important to know about the credit laws established to protect you, the consumer. Thus, the three types of credit are: noninstallment, installment, and revolving open-end credit.

Types of Credit Noninstallment credit is credit that is extended for a short period of time such as 30 days or less. You, the consumer, borrows the money to make a purchase, and you repay the amount owed next month. Noninstallment credit is usually issued by department and furniture stores, where the store is willing to lend the amount needed for your purchase. Again the expectation is that it will be repaid in 30 days. This type of credit may be useful to a person who is expecting money soon in order to repay the borrowed amount on time.

Types of Credit Cont’d The next type of credit is installment credit. Installment credit is used to help the customer repay the money owed on purchases over a longer period of time. As such the borrower is required to make monthly payments. Part of each payment is used to reduce the principal, which is the total amount of money on the loan. Installment credit/loans span a few years and are typically used for purchases such as boats, cars, and expensive pieces of furniture.

Types of Credit Cont’d Lastly, we have revolving open-end credit. Revolving open-end credit, such as credit cards, allows consumers to borrow up to some present maximum amount that usually ranges from $1,000 or $10,000. The credit limit is established based on the borrower’s income level, debt level, and overall credit record. Consumers who use revolving credit to make a purchase can either repay the entire amount off at the end of the month, or spread the payments over a longer period of time. Likewise, you can continue to make purchases so long as you don’t exceed the credit limit.

Advantages of Credit As we’ve previously seen, credit helps us make larger purchases sooner rather than having us save for an unspecified period of time. Using credit also simplifies your finances by eliminating the need to carry cash or checks. Furthermore, using credit wisely can also help you establish a good credit history, which makes it less expensive for you to use credit in the future. Example: People with a good credit record, which includes making regular payments on time, may be able to borrow money at a lower interest rate than those with a poor credit record.

Disadvantages of Credit Many disadvantages of credit include the fact that it can be costly. Using credit incorrectly can cause serious and long-lasting damage to your financial life. When you borrow too much money, you will have difficulty making the payments, therefore it is easier to get credit than it is to pay it back. Just as a good credit history can result in lower interest rates, a bad credit history can raise interest rates. Example: Individuals who borrowed money to buy a home or car, and failed to make payments, may have these items repossessed by the bank.

Disadvantages Cont’d After your car and home are repossessed, the bank can sell these items and keep the money. Lastly, the failure to repay debt can lead to bankruptcy. Bankruptcy is the legal process in which the court takes control over certain aspects of your financial life. Therefore, it is wisest to use credit cards only for purchases you plan to pay off when the bill arrives. Ex: If you borrow $3,000 with a 21% interest rate, and you pay the minimum every month, it will take almost 23 years to pay it off.

Credit Acts Note: There are resources available should using credit become dangerous to your financial health. Moreover, there are federal laws to help protect you when looking to acquire credit. The Equal Credit Opportunity Act prohibits creditors (people who provide credit) from denying you credit based on gender, age, race, national origin, religion, etc. Within 30 days, creditors should notify applicants and tell them if they will receive credit and if not, why. Now, we know there are laws to protect you, but who tracks your credit history? Credit bureaus collect credit information and tracks the credit history of customers.

Credit Bureaus There are 3 major credit bureaus in existence to assist when requesting you credit report: Equifax, Experian, and TransUnion. Your credit report shows every application for credit, bills paid on time, credit balances paid on time, and highlights late fees. You can access your credit report once every 12 months for free. Like everything important to your financial health, there are federal laws for your credit report, too!

Credit Report Acts The Fair Credit Reporting Act limits the sharing of your financial information only to firms who have a legal purpose for it. Remember to always view your credit report often to ensure that it contains accurate information, specifically your credit score. Your credit score assesses your “creditworthiness”. Your scores are calculated by the Fair Isaac Corporation. Your FICO score is between 300 and 850. Anything below 599 is valued as “poor credit”.

Credit Card Threats There are threats to your credit and it comes in the form of identity theft. Identity theft happens when someone steals your information and uses it for personal gain. For example, someone may use your information to open up a Bloomingdale’s credit card. When the thief reaches the credit limit and doesn’t pay the bill, you’re left to suffer. According to the Federal Trade Commission, 17.6 million (as of 2014) people experience identity theft every year. Thieves use a few tactics to steal information. The first tactic is shoulder surfing.

Threats Cont’d Shoulder surfing occurs when someone overhears your personal conversation or views your information and steals it. The second tactic is skimming, which involves copying your credit or debit card information by attaching your card to reading machines. This can happen at restaurants and department stores. The third is pretexting, which occurs when a thief poses as a bank representative, or business, and asks for your information through a survey. Online pretexting is also known as phishing, and occurs when people e-mail you asking you to verify your account information. The last tactic is pharming, for which e-mail viruses are sent to redirect you from a legitimate website to a website designed by the thief to steal information.

Identity Theft Protection Here are some ways to protect against identity theft: Secure your wallet by taking out anything with a Social Security Number and PIN for debit cards. Shred your receipts and credit card offers. Shop online via secure websites. Don’t verify any information over the phone or e-mail unless you initiate contact. Monitor your expected deliveries on credit card purchases. Install firewalls and virus software on your computer.