Understanding Credit
Before you use credit, it's important to understand why you would use it and how to use it wisely.
Things to Consider Before Using Credit
Good Debt vs. Bad Debt
- Good debt describes borrowing that can improve your overall financial situation over time. For example, a student loan for education that could help you secure employment and a higher income.
- Bad debt describes borrowing to buy things that you consume or that have short-term value. For example, going into debt to buy a new phone when your old one works just fine.
Impact on Your Budget
Here are some questions you can ask yourself before you reach for your credit card to make that purchase. Asking yourself these questions will also help you spend wisely and not incur unnecessary debt.
- How much do you need to borrow?
- Do you need the money right now or can the expenses wait until you have money saved?
- Can you afford the monthly payments?
- What happens if you miss or can’t afford a payment?
Read the Fine Print
- Take the time to read and understand the terms and conditions associated with your credit or loan agreement.
- Ask questions if anything is unclear to you.
The Four "C"s of Credit
The four C's of credit helps you further understand the use of credit and what it means to pay your credit debt.
Character: Will You Repay the Debt?
Character refers to your desire to pay off your debts when due.
Potential creditors will look into your financial history to determine how likely you are to pay back your debts when they are due.
Capacity: Can You Repay the Debt?
Capacity refers to your ability to pay back your debt.
Potential creditors will consider and review your income, expenses and savings. This gives creditors an idea of whether or not you’re able to pay back your debts in a timely manner.
Capital: Do You Have the Financial Ability to Pay?
Capital refers to your long-term financial strength and assets to pay off future debts.
Having a house, car, job and other valuable assets will increase your chances of receiving credit from financial institutions.
Conditions: Are There External Conditions that Could Influence the Repayment of Your Debts?
Conditions refers to events and conditions that are beyond your control that could impact your ability to pay off debts, such as being laid off at work or in an economic recession.
Need More Information?
If you want to learn more or get more resources on how you can manage your money, book an appointment with a financial coach.