Best practices for using credit

Is there a new car or TV in your future? If you don’t have the full amount to cover your purchase, using credit can help with the expense. However, when you use credit without forethought, you could easily find yourself in debt and having a hard time paying back what you owe. Here are some best practices for using credit.

Know your credit types
Consumer credit is largely made up of two forms of credit: installment loans and revolving credit. Installment loans include auto loans, student loans and many types of personal loans. Installment loans have a set timeframe in which to pay off the loan and can have a fixed or variable interest rate. (e.g. three-year car loan at five percent.)

Revolving credit includes home equity lines of credit (HELOC), credit cards and store charge cards. With revolving credit, each time you make a purchase, it’s like taking a small loan against your credit limit. Be aware that the interest rate attached to your card at the beginning may be subject to change at a later date. Also, while there is no set timeframe to pay (unlike a three-year auto loan) the interest on your account balance will continue to add up until the bill is paid in full.

Do your homework
Take time to shop around for the right lender to find the best interest rates on loans. This doesn’t mean you should apply for multiple loans; just look. If you find interest rates are higher than anticipated, consider postponing your purchase.

Understand your credit score
Too much debt can lower your credit score, which can impact your ability to qualify for a mortgage or car loan at a reasonable rate. But when you use credit wisely you create a good credit history, which can open many financial doors. Carry balances of no more than 30 percent of your credit limit to enhance your credit profile. A higher credit score could mean a more affordable, lower loan rate.

Review the fine print
When applying for a new credit card, understand the costs involved and choose one that offers the lowest interest rate. Be sure to check the card agreement for information like cardholder fees, interest rate changes and user rewards to make sure the terms line up with your needs. Most of all only use the card when you can pay the balance in full each month so as not to add on additional debt.

Article provided by Local Government Federal Credit Union.
The advice provided is for informational purposes only. Contact a financial advisor for additional guidance.