understanding credit

What You Need to Know about Credit

These days, most people use some sort of credit to make purchases, improve their homes, and more. But not everyone understands some of the basic principles behind credit. If you're new to using credit, or you aren't sure how to manage it, here are a few things we at Fifth Third Bank think you should know…

Some lenders will offer deals allowing you to make payments over an extended time, before they start charging interest.

Remember:

$ Borrowed + Interest = Total $ Paid Back on Your Loan

Credit cards for making just about any purchase, depending on your card limit
Lines of credit, which may allow you to take on bigger projects, like home improvements
An installment loan, like a mortgage or car loan
Paycheck advance services, where a business gives you money based on the paycheck you'll be receiving soon, anticipating that you'll pay it back as soon as your pay day rolls around

Your credit score is based on your history of repaying previous loans, and other factors
A higher credit score indicates to a lender you are a responsible borrower.
Potential landlords, employers, and even utility companies may even check your credit score before agreeing to a lease, job, or contract.

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How Credit Can Help You

When used wisely, credit can be a good way to manage cash flow. For instance, you can use a credit card to pay for common monthly expenses—like utilities, groceries, and insurance—and then pay the card off in full each month. This way you have just one payment to make, instead of sending multiple checks to different product and service providers.

Remember:

Pay off your borrowed amount quickly. If you pay your full credit card balance each month, for instance, you won’t be paying interest fees on top.

You can also use credit offers to build a history of good bill payment. When you make credit payments on time, every time, you're establishing a good credit rating—and that can help you qualify for future home mortgages, car loans, and more.

Tips for Making Sound Credit Decisions

While there are some great benefits to using credit, there are some downfalls, too. If you don't manage your credit usage carefully, you may run into financial problems. Here are some tips for using credit wisely:

Make payments on time, every time. Late payments can result in costly fees, and increases in your interest rate.

Many credit offers provide a low or 0% interest rate to start—but after a certain period (commonly a year or 18 months), that interest rate goes up. So mark your calendar and set a reminder for when that time period ends. Then do your best to pay your balance before the higher interest rate kicks in.

Example:

$1000 credit card balance
14% interest rate
$40 minimum monthly payment

Total payoff time: 5 years, 3 months

Total amount paid: $1,328

If you make minimum required payments only, it can take a long time to pay back borrowed money—and it will cost you more over time.

Before using credit to buy something, think hard about that purchase. Do you really need it? If you consider the example above, how will you feel about that purchase by the time you pay it off—especially if you can only really afford the minimum monthly payment?

Credit offerings like paycheck advances can seem like a good idea. They give you cash when you need it, before you receive your paycheck. But this approach is expensive. Fees are high—and worse, it's easy to fall into a cycle of using your paycheck up before you get it. It can be very difficult to catch up. So reserve these products and services for a real emergency.

To do so, add up your total, standard monthly income—then subtract your essential bills to determine how much money you can keep for savings or non-essential spending. Fifth Third Bank's budget creation tools can be a constant resource in helping you track and manage your spending.