Having credit available to make important purchases can be extremely important, but can also be confusing. Here’s your step-by-step guide for getting credit responsibly.
What is credit?
Credit is an amount of money that is borrowed from creditors (for example a bank) with the understanding that the money will be paid back to them within a certain timeframe.
The better your position is to pay back the money, the better your interest will be.
Questions to ask yourself before you take out credit
- Do you really need the credit or can you save up?
While there are many things we all would like to have (and could buy on credit) it’s not always a good idea to buy on credit. Many times the smarter, WalletWise decision is to save up for the thing you want to buy.
- What are you going to use the credit for?
Taking out credit to continue your education, for example, can see you move up in the world and can serve as an investment for your future.
Buying items on impulse or perishable items – for example, food – however, is a bad idea.
- Is this a wise purchase?
If you’re going to make an expensive purchase on credit, it’s always a good idea to sleep on it for a few days.
This will give time to cool off and make sure that you really need the item that you’re going to buy. Just “wanting” something is not a reason to buy it on credit.
- Can you afford to pay the credit back?
When you make a large or expensive purchase it’s always wise to make sure that you can afford the new credit instalment that you will be paying.
How do you apply for credit?
Applying for credit is actually very simple. Once you’ve decided to get a credit card (or a loan), you need to go to a trusted financial institution like your bank to apply for credit.
Once your application has been approved, you’ll be able to open the credit account and sign the contract that explains how you need to pay back the credit that you’ve used.
The financial institution will also let you know how much credit you qualify for.
You can decide whether you want to have the maximum amount of credit that they’re offering or if you want less.
The bank or financial institution will use your credit score to decide whether you can get the credit or not.
What is a “credit score”?
Your credit score is a number between 0 and 999 that the Credit Bureau gives you based on how much debt you have and how you manage that debt.
For example, if you have a good credit score (more than 600), it shows the credit providers whether you qualify for a loan or credit card and how much interest you should pay. It is quite easy to obtain low interest rates with a credit score above 650.
A credit score also shows whether you are a high risk to lend money to or not. For example, if you have a score that is below 490, you are considered to have a poor credit score. This score means that you might not qualify for loans.
Which type of credit is right for you?
Depending on what you’re going to use the credit for, you can decide to either start a credit account or take out a personal loan.
For example, you may want to rather take out a student loan if you’re going to study for a diploma or degree and use a credit card for a short course that costs a lot less.
Credit cards, however, can be used in emergencies, for example your car breaking or having to see a doctor. Payment can then be made immediately and paid off over a number of months.
For more information, visit the WalletWise website.
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