Are you Credit Savvy?

Your relationship with credit may be transactional- as in your passage towards buy-now, pay later. But how much do you really know about how it works?

When it comes to your money- knowledge is power- and can be your best ally in the road towards financial success.

Get Interested in Interest

Have you really broken down your monthly bill? How much does your card charge for an interest rate? Some department store cards  charge close to a staggering 30 percent, when applied to an ongoing balance adds up to some serious extra amounts.

Credit companies want you to carry a balance, so they can make your money.

Move out of Minimum Mentality

I’m making my minimum payments. I’m all good right?

In the same interest rate vein, if you are ever hoping to erase or seriously minimize the debt, you’ve got to move beyond the minimum payment mentality.

Picture a sturdy oak tree (your debt). Would you rather use a sharpened axe (concerted, consistent, substantial payments) or a butter knife (minimum payments) to knock it down?

How Much Credit Can I Handle?

The answer to this lies in your cash flow. If you are barely able to make minimum payments, or find yourself consistently cash poor every month, you have likely over-serviced your debt.

What does that mean? When you apply for credit, lenders look at your total debt service- which is the relationship between your income and your monthly obligations (shelter, credit, heat). The maximum allowed toward servicing your debt is typically 40 percent of your gross income (usually lower for self-employed people, and some other exceptions).

As a rule of thumb, you should aim much lower than that- so that you have a steady cash flow, which will allow you to manage credit- rather than it managing you.  It will let you accommodate emergencies much more easily.

Not All Credit is Equal

Credit card and lines of credit are open, revolving credit- which means that once you’ve paid them down you can use them again- which can pose a bit of a risk for those who tend to overextend themselves, credit-wise.

An installment loan applies the same amount every month at a set interest rate, while you chop away at your debt.

If your goal is to minimize your debt load, installment credit can be more useful.

You can also lower your interest rate by securing the loan with an asset (new model car, home equity, etc).