Considering using credit? Credit can be a useful tool and credit cards can be a convenient and flexible form of payment, but they must be used responsibly to make the most of your money. Though credit cards allow you to purchase items instantly without using cash, it’s important to use your cards as carefully as you would handle your cash.

Before getting a credit card or any other line of credit, first define your financial lifestyle and search for the product which fits with your situation and spending habits. After choosing a product, especially a credit card, take time to understand its features and how it can affect your credit.

Also known as a credit rating, a credit score reflects how reliable you are when it comes to repaying money. Lenders use it to help determine whether you qualify for a credit card, loan, mortgage or other services like a mobile phone contract. While some countries have no credit scoring system in place, many countries around the world have put one in place. Credit scoring systems are not universal, but in countries that do calculate credit, these systems share a core function. They exist to show an individual’s ability to meet various kinds of financial obligations.

Credit cards provide security, convenience, and even rewards based on spending. However, if cardholders don’t manage their cards carefully, they may find themselves facing unwanted consequences like poor credit or hidden fees.

Get to know credit cards with these credit terms:

1. Annual Fee – The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees.
2. Annual Percentage Rate (APR) – The yearly interest rate charged on outstanding credit balances.
3. Balance – An amount of money. In personal banking, balance refers to the amount of money in a savings or deposit account. In credit, balance refers to the amount of money owed.
4. Credit Bureau – A reporting agency that collects information on consumer credit usage.
5. Credit Line – The maximum amount that can be charged on a specific credit card account during a particular period.
6. Credit Rating – Also known as a credit score, this usually numeric rating reflects how reliable you are when it comes to repaying money. It can be crucial to have a good credit rating if you want to borrow money or apply for a credit card or loan.
7. Grace Period – The period of time after a payment deadline when the borrower can pay back the borrowed money without incurring interest or a late fee.
8. Introductory Rate – An interest rate offered by credit card issuers in the initial stages of a loan. These rates are often set much lower than standard rates to attract new cardholders. Make sure you know how long the introductory rate will last and what the standard interest rate will be once the introductory period ends.
9. Minimum Payment – The minimum amount of money that you are required to pay on your credit card statement each month to keep the account in good standing.
10. Overdraft Protection – A banking service that allows you to link your checking account to your credit card, thereby protecting you from overdraft penalties or bounced checks in the case of insufficient funds.

To make the most of your credit and maintain great credit, it’s essential to understand their pros and cons of using it. Maximize the benefits and minimize unnecessary costs by learning about the advantages and disadvantages of credit.

Advantages

• Instant Purchasing Power – Credit can help with unexpected expenses and give you the flexibility to pay them over time.
• Security – Lose cash, and it's gone. Lose a credit card, and it can be canceled with no harm done in most circumstances. Also, you need to be prompt about reporting a lost or stolen card to be protected against its unauthorized use.
• Record Keeping – Your credit card statement is an itemized list of your monthly expenditures, which can be helpful when it comes to expense tracking and budgeting. This kind of recordkeeping is common with many kinds of electronic payments.
• Convenience – Electronic payments including credit cards are widely accepted as a form of payment in an increasing amount of situations, such as in-store, online, in-app and when ordering via mail or telephone.
• Bill Consolidation – Bills can be paid automatically via credit card, consolidating several payments into a single sum.
• Rewards – Using a credit card with a rewards program may earn you benefits like free travel.
  

Disadvantages

The main disadvantage to credit card usage is the potential cost in interest and fees. Wise use of credit means understanding those costs and acting accordingly. Keep track of your spending to ensure that you can repay your credit card bill in full when it is due.

The True Cost of Credit Card Purchases

If you don't pay off your credit card balance in full, the interest assessed on your account means you may be paying more than you expect. And if you spend beyond your means, the resulting interest and debt can become significant.

See how much extra you might pay on a credit card purchase with varying interest rates:

When you apply for credit, depending on where you live, lenders may determine your credit risk by examining your credit rating or scores. Organizations can rely on credit bureaus, which track and keep credit information about you that is used to calculate your rating. This might include items like your payment history, the amount of money you owe, the length of your credit history and the number of recently opened credit accounts. Different bureaus have different methods and may use different information, so your credit rating may vary between them.

Your rating or score helps lenders determine the credit risk associated with loaning you money. The better you score, the lower your perceived risk to a lender.

10 Ways to Use Credit Wisely and Keep Your Credit Strong

1. Complete credit applications carefully and accurately.
2. Use your credit lines responsibly — don’t let them reach their limit or spend beyond your means.
3. Choose your credit cards wisely and make sure you understand all of the terms and features.
4. Attempt to pay your credit card balance in full quickly to avoid overpaying interest, but at least make the minimum payment by the due date.
5. Always pay bills on time.
6. If you have problems paying your bills, contact your creditors. In many cases, they will work with you to figure out a payment plan.
7. If you move, let your creditors know your new address as soon as possible to avoid losing bills or receiving them late.
8. If your credit card is lost or stolen, report it to the issuer immediately.
9. Where available, check your credit reports periodically for inaccuracies and immediately report errors to resolve any issues.
10. Establish a consistent work history.
    

Understanding what credit is and how your credit can be improved is a crucial step toward reaching your financial goals. Your creditworthiness is a measure of factors that may affect your ability to repay money given on credit. Ratings and scores commonly consider how you’ve repaid previous loans, any outstanding debt, and other financial history.

Creditworthiness tends to be dynamic and may change over time according to how much debt you take on, how you manage your bills or as time passes. Do not trust “fast fixes” to improve your credit score.

To build credit wisely, learn some of the factors that commonly affect credit and how you can manage them to strengthen your credit:

1. Character. A lender may decide how reliable you are to repay debt based on your credit history. Lenders are likely to look at items like your credit use, bill payment, residential history, and sometimes, how long you’ve worked at your current workplace.
   One of the most effective ways to strengthen your credit reliability is to make payments on time. Some credit card companies offer free, automatic alerts to help you keep track of your balances, payment due dates, payment history and purchase activity.
   
2. Capital. Many times, a lender will want to know if you have valuable assets such as real estate, personal property, investments or savings with which to repay debt if income is unavailable.
3. Capacity. This refers to your ability to pay off debt. Lenders will often look to see if you have been working regularly so you receive regular income to support your particular credit use. They may look at your salary, check whether you have pre-existing loans or debts, and assess whether you have family members who depend on your earnings.
4. Collateral. A lender may require you to put up some form of collateral — a property or asset — for certain types of loans like auto loans. When you take out a car loan the vehicle you buy is often used as collateral for the loan.
5. Conditions. This refers to the condition of the economy and how it may affect your ability to repay the loan.

To ensure you aren’t taking on more than you can pay off, it can be good to follow the 20-10 Rule. This rule of thumb suggests you avoid borrowing more than 20 percent of your annual net income on all your loans (not including mortgage loans), and that payments on those loans do not exceed 10 percent of your monthly net income.

Research Credit-Building Options
If you’re looking to rebuild damaged credit, research whether secured credit cards, credit-builder loans, or similar options are available to you. These options may require security deposits and might have strict limitations on how much you can borrow.

To get a glimpse of your financial future, many businesses look at your past. In many places around the world, your financial history is contained in your credit report. The information in the report can determine everything from whether you qualify for a loan and the rate you'll pay on that loan to your prospects for renting an apartment or obtaining car insurance. A strong credit report is key to building and managing your finances.

What Is a Credit Report?
Your credit report is a profile of your financial history. It shows lenders, landlords and employers how you have managed money in the past and helps them decide whether to do business with you. Credit reports contain a consumer’s credit history including things like debts, bankruptcies, unpaid bills and credit card usage.

Who Can See Your Credit Report?
While they are not used everywhere, a credit report can and most likely will be reviewed by anyone planning to give you a loan or credit, such as lenders, banks, credit card issuers, auto financing companies, mobile phone providers, and insurance companies. Reports also may be checked by landlords and potential employers. In many places where credit reports are gathered and used, anyone with a legitimate business need can access your credit report, though an employer (or prospective employer) typically requires your written consent to do so.

Credit Bureau Contact Information
If available, the credit bureau in your country will generally allow you to check your credit report for accuracy for free.

Retailer Credit Cards
Retailer credit cards are bank-issued credit cards co-branded with a retailer. Most often you can use the card only at that retailer or a specific group of retailers. Store credit cards can help you build credit, offer incentives and savings, and make shopping at your favorite retailers convenient. However, be sure to pay your balance on time and stay below the (oftentimes lower) credit limit so that your credit score isn’t negatively impacted.

Layaway
Layaway means paying for items with an initial down payment followed by smaller installments paid over time. Retailers will keep the merchandise while you pay small installments over a specific period, determined by you and the retailer. Once you have paid the total amount owed, you can pick up your items. Layaway does include flat fees, but there is no interest associated with the purchase.
Layaway programs do not run credit checks for you to use, you simply need a proof of identification. The downside to layaway is that the fees can be high and if you are unable to complete the payment installments over time, you may be charged additional fees to leave the agreement.

Buy Now-Pay Later
Buy Now – Pay Later (“BNPL”) or “installment payment”, is a newer type of layaway program where you pay installments over time to pay off a purchase. However, with BNPL you do not have to wait to receive the item, you receive it right away. It varies whether a BNPL program includes interest or is interest-free.

Recurring payment
Typically used for mortgages, auto loans and student loans, recurring or installment credit gives you a fixed, lump sum of money that will be paid in recurring installments until the loan is paid in full. Installment credit can have lower, fixed interest rates if you qualify.

Payday Lending
Payday lending is a high-interest, short term loan designed to be paid back in one payment. These loans are usually based on your income, and you often need to provide a paystub to qualify. Making sure you can pay the amount back in time is critical in payday lending.

This article is provided for general informational purposes only and should not be relied upon as legal, tax, financial, or other advice. You should consult an appropriate professional regarding the application of this general information to your individual circumstances. Visa is not responsible for your use of this information.