Smart credit moves can improve financial health

With the news lately so full of stories about how so many people have damaged their finances and lives with credit card debt and other types of financing, it’s all too easy to forget that credit can be a positive force in achieving health and security. fiscal. When used responsibly, with knowledge, and foresight, credit can be a powerful tool, capable of assisting in the achievement of personal and business financial goals.

Recent statistics offer an idea of ​​how credit is used in the United States today. According to data from the Federal Reserve Bank, in 1968, the combined credit debt of Americans was about $8 billion in today’s dollars. Americans today owe a total of about $880 billion, and 40 percent of Americans spend more than they earn in a year.

Interestingly, according to information from carddata.com, in 2006 credit and debit cards were used to make $51 billion in fast food purchases. An Experian-Gallup Personal Credit Index survey says about half of those who use credit cards pay only the minimum monthly payment. With the average interest rate for bank-issued credit cards reaching 19 percent in March 2007, according to cardtrak.com, that’s a lot of the change spent carrying what, in many cases, is non-essential debt. .

It doesn’t have to be this way, the use of credit sapping the economic vitality of family budgets and personal finance plans. Credit can be used as a tool to help build and secure financial well-being. However, that means knowing how credit works and using that knowledge to your advantage.

Understand that every move you make, credit-wise, is recorded. That data is collected and analyzed, and a score is assigned to your credit behavior and debt management. There are several credit reporting agencies and credit scoring methods. Perhaps the best known is the FICO score, the brainchild of the Fair Isaac Corporation.

The credit score is commonly used as a kind of predictor of the probability that a consumer will default on their financial payment obligations. Those with higher scores, above 700, are considered very good on the FICO scale, they are considered more creditworthy than those with lower scores. The better the credit score, the less risk involved for lenders, which translates to lower interest rates and less expensive credit.

For those who use credit as a tool, impulsive and unruly spending is simply not part of the plan. Going into debt without a clear plan for how and when it will be paid back is counterproductive to those who work to increase available credit by establishing their creditworthiness with good credit reports and high credit scores.

The first smart credit move you can make, when choosing between credit options, whether it’s selecting the right credit card or shopping for a personal loan or mortgage, invest time in reading every detail of the terms and conditions. conditions and calculate the numbers. . Do the math and figure out exactly how much each credit option you’re considering will cost once interest and fees are calculated.

If you are considering credit cards and other types of credit that may have variable interest rates, such as adjustable-rate mortgages, be sure to account for changes that will occur after the introductory period has passed.

Thoroughly researching credit opportunities in this way allows a consumer to take advantage of such offers as a free credit card balance transfer and utilize their full potential. A balance transfer can serve as a valuable tool to help manage and reduce debt.

A balance transfer can allow a consumer to transfer interest-bearing debt from one credit card to another credit card with 0 percent interest. This 0 percent interest is offered for a specified period of time, after which rates will increase to a rate that is set forth in the agreement. This time period varies according to the specific offer available from a particular credit card company, generally ranging from 3 to 18 months.

This can be a smart move that results in significant savings under the right circumstances, particularly when choosing a 0 percent APR no transfer fee type of offer. Ideally, when the interest rate goes up after the introductory rate, it will be one that is lower than what the original credit card had.

Instead of paying interest on the debt that accumulates on the card, the consumer can focus on paying off the principal on the debt, perhaps even eliminating it entirely with a good budget plan in place. Many of these free balance transfer opportunities also allow you to make and complete new purchases without interest.

The use of this type of credit opportunity offers the opportunity to improve the credit rating by facilitating the focus on the payment of the debt. It’s a great opportunity for someone who has started down the wrong path with their credit by having enough debt that paying the interest each month eats up most of the payment, leaving little to apply toward principal.

Other smart ways to use credit—that is, with an eye toward the future, when you want to make a big purchase, like a house, and want the best possible rates and terms—include gradually building a good credit report. This is done by using credit wisely, buying the things you need, and reliably meeting your payment schedule.

Be selective with the debt you contract. Debt that is for non-essential consumer goods or luxury goods should be carefully evaluated if the balance will not be paid in full by the payment due date. Is it really worth it now to have the additional cost of interest (well into double digits for many) that will be charged to maintain the debt, instead of saving and paying in full at the time of purchase? Smart debt tends to be productive in nature, for something that will produce a profit, like business equipment, or has something of value to offer, like education-related expenses.

Don’t let the bad press credit is getting lately scare you away from using credit as a tool to improve your lifestyle and ensure your financial health and future. Become an informed consumer and use credit wisely by developing the skills he needs to make smart decisions that will move him ever closer to his personal and financial goals. That way, you’ll have the credit opportunities you need when it’s time to make big financial moves, like buying a home or starting a business.