How to Understand Consumer Credit

By Stephanie Mojica

  • Overview

    Understanding consumer credit is one of the most important yet challenging aspects of a person's life. Without a good credit report, getting cars, general loans and credit cards, houses, and apartments can be more difficult and cost a lot more money. In addition, some jobs require a relatively clean credit record. There are also legal consequences to not properly handling consumer credit, including garnishment of wages. However, the basic rule of consumer credit is to borrow as little as you need and always pay on time.
    • Step 1

      Have a few cards with balances at 50 percent or less than the credit limit. In addition, you should have no or few late payments or collection notices, and no public records of successful lawsuits against you, which are called "judgments." However, a college student with no credit history can usually get starter credit cards with top lenders.
    • Step 2

      Pay at least the minimum amount due each month on a credit card bill or loan to avoid late fees and negative credit reporting information. Once a bill is 30 days late, the creditor can legally report it to the three credit bureaus: Equifax, Experian and TransUnion. The more this happens, the worse your credit score can get.

    • Step 3

      Avoid falling behind on medical bills and other obligations, such as utilities and cable. Failure to keep up with such bills can lead to the creditor hiring a collection agency to collect the debt, a ding on your credit report and perhaps even a lawsuit.
    • Step 4

      Charge as few items as possible. That is the smartest way to use consumer credit. If your card has 15 percent interest and you keep a $100 dinner on it for one year, you have paid $115 for a dinner that is long gone. Use your cards as needed, but strongly consider avoiding purchases you cannot afford. The more credit you use, the lower your credit score is because of the risk factor of borrowing too much money.
    • Skill: Moderate
    • Tip: Remember that you can view your consumer credit reports for free once a year. See the Resources.
    • Warning:
    • Do not let people use your credit cards unless you trust them completely and would be willing to pay for their purchases if they do not. You as the cardholder are responsible for any authorized charges on your account.

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