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Credit is more than just credit cards. It's a whole system that includes what you borrow, who you borrow from and how and when you pay them back. And this credit history is all recorded in your personal credit report by a credit reporting agency. Learn more at Understanding Credit.
Basically, the way you've handled your credit in the past can predict how you may behave in the future. That's why so many potential lenders are interested in your credit report. The credit history you build even while at college or university will likely be considered when you are ready to buy a home, apply for a job, get insurance or even purchase large electronics and appliances.
A credit card is simply one of many tools used for borrowing. The upside is that it offers convenience and flexibility when borrowing and can help you build a good credit history. The downside is that, when used improperly, it can lead to extra debt from compounding interest and make it both more difficult and expensive to borrow in the future.
For example, if you bought a $1,000 item with your credit card and didn’t pay the balance in full within the grace period if any, you would owe that $1,000 plus interest. If your annual rate was 17.99%, you would owe $1,014.39.
If you didn’t pay the balance in full the next month, the interest would compound and you would owe $1,028.99. Clearly, you can see the debt beginning to pile up. Also, that's $28.99 that you need to pay towards debt instead of other things you might want.
Therefore, it's often best to wait to buy large, non-essential items when you have the cash on hand. Because interest compounds monthly on unpaid purchases and daily cash balances, you can wind up paying a lot more than the original price on those items.
Smart spending starts with managing needs vs. wants. Make sure you take care of all your needs first. These can include food, rent and loan payments. Then, set aside some money for emergencies, like auto repairs or illnesses. In life, unexpected expenditures always come up and an "emergency fund" will help you be better prepared for them.
If there's money left over, prioritize your wants and spend only that amount left over. Avoid any spending that will take on extra debt.
A budget will help you keep track of the money you have coming in and going out each month. It's pretty easy to create and it can help you figure out where to spend and where to save. If you've never used a budget to manage your money, now is the time to start. Just follow these steps:
- Track your spending to see where the money goes, relative to your income.
- Find out how much you need each month to make all your payments.
- Make as tight a budget as you can and stick to it.
Get started with this Basic Budget Worksheet.
Sometimes it seems that you can't go online or open a newspaper without reading about identity theft or credit fraud. The good news is there's a lot you can do to keep your identity- and your credit-safe:
- Guard your Social Insurance Number, PINs, passwords and account numbers, and don't leave them in an unsecure place.
- Guard your laptop, cell phone, PDA and other technology against theft or fraudulent use. Avoid sharing your technology.
- Treat your card and PIN as if they were cash. Do not leave them unattended in a restaurant, car, wallet or handbag.
- Make sure websites are secure (look for the "lock" symbol and a URL that begins https://) before buying online.
- Avoid sharing personal information on social networks like Facebook.
- Keep copies of your statements and other important documents in a safe and secure location; shred personal documents before throwing them away
- Don't leave important mail in your mailbox too long.
- Be cautious when using an ABM or debit card machine; cover your PIN and take your receipt.
See more recommendations from our fraud experts at Security Tips.
