Credit and borrowing

It can be easy to get caught up in the world of credit, which is why many people often find themselves drowning in debt. To better prepare yourself for the responsibility of borrowing money, it’s important to understand what it entails and learn how to do it wisely.

Your credit score and report affect your buying power
Three national credit bureaus, Equifax, Experian and TransUnion, collect information about you all the time to form your credit report. They then use that information to come up with your credit score. This score is based on your payment history, your outstanding balances, the length of your credit history and the types of credit you use.

Your credit report and credit score indicate your creditworthiness to potential lenders. If you have a favorable credit report and a high credit score, lenders think it is likely that you will continue to manage your finances well and they may give you better interest rates and higher limits on loans and other lines of credit. So, it’s important to pay your bills on time and keep your credit balances low.

Shop around for the right kind of credit for your needs Since getting a loan for a major purchase like a car or a home is a relatively long-term financial commitment, you should figure out what is right for your lifestyle and income. The same goes for credit cards. Rather than agreeing to the first offer that comes your way, comparison-shop for the best deal.

When choosing a loan, you may be offered a fixed rate of interest or an adjustable rate. A fixed rate mortgage has a rate that remains constant throughout the duration of the term. With an adjustable rate mortgage the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly. Watching trends in the economy can be a good way to determine if an adjustable rate loan is right for you. There are also mortgages called hybrids, which, as their name suggests, combine the features of both. They start off like a fixed-rate mortgage, with a stable interest rate for up to ten years. But then they convert to an adjustable rate mortgage for the remaining life of the loan.

You may also want to keep in mind that some companies offer teaser rates. Usually, the rates and figures advertised are not guaranteed. Only your credit report can determine the actual terms you will be offered. Also, be aware of offers that sound too good to be true. Research what the fine print really means. While interest-only mortgages are good options for some people, you need to understand that the interest-only period doesn’t last forever. After the first five or ten years of low monthly payments, you need to be prepared to start paying a much higher amount.

Educating yourself about credit and borrowing before you take out any loan will help ensure you benefit from credit rather than ending up over your head in debt.


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