Take the Quiz.
Earn credit towards the borrowing badge by taking this quiz on what you’ve learned through Staying on Good Terms: go.uillinois.edu/EstablishHealthyCreditQuiz
Slides for the Establish Healthy Credit webinar can be found at go.uillinois.edu/EstablishHealthyCreditSlides.
By participating in at least three Borrowing Badge-eligible events, you could earn a digital badge to enhance your online professional portfolio. Learn more about the Financial Literacy Badges Program by visiting: badges.illinois.edu/usfsco.
Credit can have many definitions. Credit as it has to do with money, can be defined as:
- Money that a bank or business will allow a person to use and then pay back in the future
- A record of how well you have paid your bills in the past
- An ammount of money that is added to an account (Merriam-Webster)
Types of Credit
A lot of people are concerned with their credit scores. Different types of credit impact your credit scores in different ways, so it’s important to understand the main types of credit, which could be secured or unsecured, revolving or installment. A single credit account could be a combination of these types.
- Secured, where there is a tangible piece of collateral that is put up for the borrowed funds,
- Unsecured, where you are making a promise to pay back those funds, but there is no collateral asset that can be taken if you don’t pay the funds back,
- Revolving, which is a type of credit where you can charge and make payments towards the balance...
- Installment, which is where you borrow a set amount and make payments over time
According to myfico.com, “FICO® Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.”
Different credit accounts or credit products could be a combination of these different types. We’ve listed a few examples above, which is not an exhaustive list, and some accounts could be considered a different type of credit than what’s listed here.
An auto loan could be secured and installment since the vehicle you’re purchasing is often the “collateral” that the lender will take if you don’t make payments as agreed and you are often required to pay back that initial amount you borrowed over a set period of time.
Credit Cards could be secured or unsecured depending on the type of card, but they are a revolving type of credit either way.
Check out resources from the Consumer Financial Protection Bureau below:
Debit vs Credit
Not all plastic cards are the same even if they have a VISA or MasterCard logo on them.
Debit cards are connected to a checking or savings account. Even if there’s a credit card logo (such as VISA or MasterCard, the charges still come from your bank account, usually the day of the transaction, and there are low costs to get cash.
Credit cards allow you to borrow money and pay back the funds later. Credit card holders aren’t required to pay off the balance each month. Many carry a large balance month after month - they are revolvers. As long as the minimum payment is made this balance can continue to grow until it reaches the credit limit. Additionally, there are high costs to access cash with a credit card.
Credit Cards & The Law
The Credit CARD Act of 2009 has many protections for consumers.
While you need to shop around for the best credit card for you, it’s much easier now to get a credit card with fair and clear billing and interest rate calculations than it used to be. For example, the law limits when interest rates can be raised on credit cards. And it prohibits certain billing practices that were not favorable to consumers.
Credit card companies can’t raise interest rates on existing balances except if you have a variable rate and the index associated with that variable rate goes up, your payment is over 60 days late, you have a teaser rate or you are in a special agreement and don’t make those payments as agreed.
Other important protections include:
- If your interest rate does increase, the new rate only applies to new charges.
- If you open a new credit account, the interest rate cannot change for 12 months.
- Six months after an interest rate increase, there must be a review with a possible interest rate deduction.
Before the Credit CARD Act of 2009, you would see a lot of credit card recruiting on college campuses, but the new law made recruiting on campus illegal. It also requires people under age 21 to have a co-signer or prove their capacity to repay.
Some credit card companies are accepting scholarships & student loans as proof of capacity to repay credit card debts, so you want to be very careful.
Using scholarships for anything but qualifying educational expenses could make your scholarships taxable income, and you don’t want to increase student loan debt just to end up with additional credit card debt either.
If you want to learn more about student loans & repayment options, watch our recorded webinar on Student Loan Repayment here.
The Credit CARD Act of 2009 doesn’t fully protect consumers so watch out for these traps.
- The law does not limit how much your interest rate can rise if you’re 60 days late.
- Your minimum monthly payment can change.
- Watch for new fees.
Pros & Cons
So the up side of credit use is that you can buy things now and pay at a later date. You are protected against fraud up to a certain degree (often $50). It can be used as a tool when face with emergencies. It is definitely more convenient when making reservations… for a hotel for instance. And you can establish good credit history to help you make large purchases in the future!
Obviously, with the good comes the bad, but if you’re aware of the downsides of credit, you can avoid the bad! A couple obvious down sides of credit include fees and interest. Credit also makes it easy to overspend, which could hurt your credit history. And, obviously, as with most financial tools, someone could steal your account number.
Types of Credit Cards
Each type of credit card has their strengths & weaknesses. To determine which credit card is best for you, consider your:
- Financial resources
- Previous experience
- Intentions with credit
Below are highlights of a few of the cards covered in the webinar.
Premium Credit Card: given to customers who demonstrate their creditworthiness and ability to pay their debt off easily.Typically, premium credit cards have higher credit limits, lower interest rates, more reward options, fewer credit card fees, and higher annual fees.
Secured Credit Card: made for people who have experienced past credit problems or who have lower credit scores. Secured cards give users a second chance to restore their credit.
Standard Credit Card: offered to the general population. Generally, this card carries a middle range interest rate and other related fees at a standardized price. It may be more difficult to comparison shop with standard cards since they are the most common and have a wider range of credit limits and fees.
Business Credit Card: cards for businesses to help the business create its own identity to keep tax records straight & to keep the business credit rating from affecting personal ratings.
- Business credit reporting– Unfortunately, not all business credit card issuers report to a major business-credit reporting agency. The best business credit cards should share payment data with a business credit reporting agency such as Corporate Experian. This will allow an owner to establish the creditworthiness of the business.
- Personal and business credit separation– For true separation, the business credit cards obtained should only report to the business credit agencies – not the business owner’s personal credit reports. This protects the business owner’s personal credit scores while enabling the business itself to establish its own unique credit profile.
Shopping for a Credit Card
When you start to shop for a credit card there are a few things you should consider. If you plan to rarely if ever carry a balance then the APR may not matter so much. On the other hand, it is very important if you don’t pay the balance in full most months. If there’s an annual fee, everyone pays that so that should be important to everyone. And, if you pay late or go over the limit often, look for a card that let’s you easily manage your account online and pay fewer fees.
Do your research! Credit card offers and other loans (such as auto loans) have characteristics that vary from one company to the next. It pays to shop around and think about these questions before you apply for credit.
- How much do you need?
- How will you use it?
- What is the cost?
- How will you pay it?
Visit University of Illinois Extension's website, Credit Card Smarts, for more information on shopping for a credit card.
Estabish Healthy Credit Habits
Monitor Credit Activity
Monitoring your credit activity, just like any spending activity, is an important part of managing your debt.
You can review your account activity in lots of ways... Even though you have more protections with credit cards, you should contact your credit card company immediately if you didn’t make a purchase that shows up in your activity.
If you are reviewing your statement activity in a mobile app, you may not see some very important disclosures, like the
- late payment warning
- minimum payment warning
- any notices of changes to interest rates
- changes to your account terms
The Late Payment Warning lets you know about any late fees you might accrue as well as how much your interest rate could go up.
The Minimum Payment Warning will show you how much longer and how much more money it could cost if you only make the minimum payment on your current balance.
For the example above, Making a payment of $103 per month, just $13 more than the minimum $90 per month, would decrease your payoff timeline by 8 years and you would save over $1,000.
It’s important to remember as we are talking about paying more than what’s required that it’s okay if you can only pay the minimum once in a while. I’ve talked to a few students that were so scared of their debt that they went without food to pay off their credit card balance faster. Don’t jeopardize your health to pay off a debt. It’s okay to only make the minimum payment too; just try not to make it a habit since it is so costly.
On your credit card statement, the paper one or pdf version, you will also have an interest charge calculation where you can watch for any interest rate changes. This is a great place to review if you have introductory APR or have taken out cash advances to see how much the interest is costing you on different types of transactions.
Talking to Your Lender
We all have those times when money is tight. As long as it doesn’t happen too often, your lender will understand if you can’t make a payment on time, but they will still charge you for being late.
Your relationship with the lender will improve if you notify them if you can’t pay on time. They will work out a payment schedule with you and will appreciate your attempts to communicate and work with them.
If you were in a situtation where you had to juggle too many debts for what you had resources to cover, you might ask for a lower interest rate or credit limit, maybe ask to change when the bill is due or set up a payment plan. Regardless of the options you agree on with your lender, you want to make sure it is in writing in case anything happens.
You can find more tips on talking to lenders or dealing with debt collectors by reading University of Illinois Extension consumer economics educator, Sasha Grabenstetter's article, Dealing with Debt Collectors.
Use Credit Wisely
Only charge what you can afford. Try to plan your credit use so you can pay off the balance every month. This way, you're establishing credit history without paying interest.
Always pay your bills on time. Whether it's your utilities, cell phone bill or credit cards, paying your bills by the due date will help your credit. Even if you can only pay the minimum, paying on time is a significant factor in establishing favorable credit history.
Understand your card terms & conditions. If you don't understand how you can use your card, it makes it difficult to manage your debts or avoid activities that could result in high fees or interest rates.
Create an emergency fund. By having an emergency fund, you can avoid the higher cost of using credit as a way to cover surprise expenses or opportunities.
Limit the number of credit cards you have. By controlling the amount of cards (and access to revolving credit) you have, you can better manage your debts. By reducing access to revolving credit, you can also increase your likelihood to receive other types of credit, like auto loans or a mortgage, with some lenders.
Behaviors to Avoid
Overcharging leads to overspending. Pay attention to your credit limit. If it’s more debt than you want to have ask the credit card issuer to lower it.
Charging up to the credit limit (or beyond) without knowing for sure how you are going to pay it off is an obvious sign of credit trouble. However, when you start using one credit card to pay off the balance on another, you are now playing a dangerous financial game that will probably lead to more than one card being maxed out. While credit card companies write off your debt (it’s called a charge off), it stays on your credit report for seven years and makes it harder for you to get low-cost credit.
Frequent cash advances are a sign that you are living beyond your means. Many lenders charge a higher interest rate and transaction fees on cash advances. These costs can really add up over time.
Holding too many credit cards also makes it tempting to spend more than you can afford. It can also make it harder to get more credit; lenders may think that you can use your cards to accumulate more debt than you can handle.
If you keep paying the minimum balance, you basically have a permanent balance. Large permanent balances can increase the amount of interest you pay to two or three times the amount borrowed. These balances can be paid off although it takes willpower to do so.
Debt must be monitored, at all times. If you don’t know how much you owe, debt has a way of becoming larger and larger.
Lending out your credit card can also affect your ability both to monitor your debt as well as opens you up to potential identity theft.
Annual Credit Checks
By federal law, you have a right to one free credit report a year from each credit bureau. You can access your free reports through a website: www.annualcreditreport.com. From this site you’ll follow links to each of the three credit bureaus to request your full credit report.
There are companies that offer free credit reports with the use of their credit monitoring or management services. With all of them, your “free” credit report will eventually cost you money.
You have the legal right, and responsibility, to check your credit report annually. You do not have the legal right to do this with your credit scores – this is one of the differences we mentioned earlier.
However, it’s more important for you to review the information in your credit reports than to worry about a single one of those hundreds of scores, because the algorithms credit scoring companies sell all use information in your credit report to come up with those numbers. Make sure the data is correct so you get the most accurate scores for whatever you’re trying to accomplish with your credit.
The easiest way to do this is to check all of the 3 bureaus at one site: annualcreditreport.com
- Don’t contact the three bureaus individually.
- Check all three credit reports of the major credit bureaus. They are competing businesses and don’t share information. You may have a mistake on one report and not another.
- There can be differences between the three reports, so review them carefully!
Want to learn more? Watch our recorded webinar, "Reports, Scores & Histories: Credit Secrets Revealed".
Benefits of Healthy Credit
Having healthy credit can:
- Reduce how much you pay for insurance
- Empower you with another way to achieve goals
- Improve your ability to land a job (in some states & professions)
- Increase your ability to get a loan in the future
- Lower interest rates & other costs
This is a Borrowing Badge Eligible Program.