If anyone is to ever truly get a hold of their personal finances they need to understand how the use of money works. Once you understand some basic princinples it will become even more possible to believe you can have an 800 credit score let alone never having to deal with how to fix bad credit.
Most people have revolving credit since it is the most commonly used. But there is some good news and that is that most consumers close to 40 % are able to pay their balances on their credit cards in full each month saving them from getting caught in the never ending battle of credit card debt. The majority of consumers have been caught in this trap and with the current economic crisis probably more so in today’s climate than any other time in previous years.Sad thing is that most just make the minimum payment on the balances that they owe on.
In its most simplistic forms there are basically two ways that you can borrow money one is a closed-end method of credit and the other is an open-end. When you apply for a loan such as a car loan with a fixed term of 3 years, for a certain dollar amount 10k, would be an example of a closed end form of credit. The terms of credit which are the conditions for the money you borrowed is the exact dollar amount, and the exact amount of time you have to pay the money back. The payments are usually an fixed dollar amount that you will be paying over the term that a portion consists of interest and the principle of the money that you borrowed. The interest charged is basically the fee you pay to borrow the money while you still owe the money.
Another good example of a closed end loan would be a mortgage you will take a mortgage of 100k over a 30 yr period and be charged an interest of 6%. You will be paying $600.00 dollars for the entire term of the loan and the interest is already included there is no more adding on other than the penalties if you happen to pay later than your scheduled payment.
Now on to revolving credit which is a form of open end credit because the length of time to repay the amount of money borrowed has no fixed date to repay as well as the amount of money you can borrow, it is basically open. There is obviously a Max dollar amount that you can borrow which is determined by your creditor which is also usually based off of your credit and your credit scores. Even the interest is based off your credit and credit scores. It is not uncommon for someone with good credit to pay an interest of 12% and someone with poor credit to pay as much as 3 times that amount of interest. Since the lower the credit scores is usually a sign of taking on a higher risk.
Because there is not fixed date to pay the balance owed and you are allowed to borrow more money you are constantly revolving to borrowing and paying on the money you use. The three most important and distinguishing features about revolving credit is the ability to borrow money when you need it at a convenience as well when you have to pay off borrowed, and the amount of interest you will be paying during that term.
Paying only the minimum payments on your credit is a guarantee to being in debt forever. The convenience of being able to have some flexibility in the amount you pay sometimes lead a consumer to be stuck owing their creditors for years. Creditors truly love the minimum payment so when the consumers only make the minimum payment the majority of that payment goes towards interest and not the principle. Also the minimum is usually so small giving the consumer a false sense of having his finances in control.
Revolving debt can be a very resourceful if used carefully and cautiously, and even sometimes is a needed necessity in our life and times. Many emergencies are easily handled with the use of revolving credit at our disposal such as a car breaking down when so far away from home on the road comes in handy. Been there done that. It is the frivolous and alluring spending at so called sales events that get the most of us in trouble. Trust me there will always be another special or once in a life time sale so if you don’t need it don’t buy it. Or go into debt of slavery to your creditors its up to you.
Any form of credit is good credit when exercising good control and making good choices. Both serve a purpose in today’s society, its just knowing how to use them properly which will insure you an 800 credit score.
