CREDITOR 

Types of Credit

Credit is a powerful tool that comes in several forms. It allows you to buy now with the promise of paying later. By understanding how each works, you will learn to manage credit successfully and use it to your advantage.

Loans let you borrow money that must be repaid with interest. You can obtain a loan for a specific purpose, such as financing a new car, paying college tuition and buying or renovating a home. You can get a debt consolidation loan, which combines all current debts from various creditors into a single reduced-interest payment plan. You can also get a credit limit linked to your checking account that gives you bounce-proof protection in case you write a check for an amount that exceeds your account balance.

Loans are generally divided into two types: secured and unsecured.

• Secured loans are guaranteed by collateral, which is an item of equal or greater value than the amount
  of the loan, such as a car, home or cash deposit.
• Unsecured loans do not require collateral and are made based on your credit score and ability to repay.

Installment loans are made for a fixed amount at the time of your application and approval. This type of loan is repaid in fixed monthly payments over a specific period. The interest charges are included in the payments. Auto loans and mortgages are examples of installment loans.

Credit cards are perhaps the most common type of personal credit. Unlike installment loans, credit cards allow repeated transactions up to a maximum credit limit, also known as your available credit limit. Each time you charge something, you are borrowing the money until you pay it back. If you decide to pay the money back over time, the credit card company adds interest charges to your account. Each month, you will pay a calculated amount until the borrowed amount is repaid.

How Much Credit Can You Afford?

The first step to using credit wisely is figuring out how much credit you can afford to take on. Take a long, hard look at your current and future financial situation before taking on any new debt. You can do this by determining your debt-to-income ratio, which looks at how much you owe each month compared to how much you earn.

Debt-to-income ratio
Your debt-to-income ratio usually gives a clear picture of your financial well-being. To calculate it, add up your fixed monthly expenses, such as rent, mortgage, or credit card payments (you do not have to include expenses like utilities or groceries). Then divide the total by your monthly take-home pay (net pay after tax deductions).

Monthly debt repayment	$800
		=
Monthly take-home pay	$2,000
Debt ratio	40%

As a general rule of thumb, your debt-to-income ratio should not be higher than 28%. Anything above this could mean being denied credit or paying a higher interest rate on your loan. Your ratio gives lenders a good indication of how much additional credit you will be able to handle.

Ten Tips for Good Credit

After you have decided on the type of credit, you need and how much you can afford, follow these steps for maintaining a good credit history.

1) Shop around for the best credit terms.

2) Understand the terms of the agreement before you accept a loan or credit card.

3) Save money each payday for emergencies.

4) Set a monthly limit for charges and stick to it.

5) Shop as carefully with credit as you do with cash.

6) Do not take on monthly credit payments unless you are certain you can meet them.

7) Pay bills promptly and in full to keep interest charges low.

8) If you charge day-to-day expenses, pay them in full each month.

9) Keep credit card information (including the phone number of the issuer) in a safe place in case your cards are lost or stolen.

10) Keep copies of your sales slips and compare the charges when bills arrive. If there is a mistake, call your issuer right away.

Applying for Credit

Creditors look at several key indicators when you apply for credit. You have considerable control over these factors based on how you manage your credit, so it is important to keep them in mind.

The three Cs of good credit
Client History–How responsible you are about paying bills on time.
Capacity–Your ability to pay back a loan based on your income and financial position.
Collateral–Security for the lender in case you do not pay backs the loan. A house, for example, would be used to collateralize a mortgage.

Positively changing your "3 Cs" will help improve your credit standing. The first two Cs are extremely important in developing your credit score or credit rating.

Maintaining Good Credit

Once you have credit, you begin to build a credit history. Lenders and property owners use your credit history to gauge your ability to repay. Sometimes employers look at it to make a judgment on your client history. Therefore, a good or bad credit history can make a big difference in getting the loan you need, an apartment you like or the job you are counting on.

To maintain a good credit history, try practicing the following guidelines:

v Pay at least the minimum payment due–on time, every month.

v Do not overextend yourself. The fewer accounts you have open–whether they are loans or credit cards–the better.

v Do not spend income now that you hope to make later.

v Avoid transferring balances unless you are definitely getting a better interest rate.

v Notify creditors when you move so that bills arrive on time and your payments are never late. Even if you do not get your bill, you still owe the payment. If you are due, date is coming up and you have not received a statement, call the Customer Service number located on your credit card or previous statement. Customer Service can tell you your minimum payment due and where to send the check.

v Check your credit report at least once a year to make sure it is accurate. Serious errors can appear in a credit report at any given time, and can cause credit to be denied. The sooner you spot an error, the faster you will be able to correct it.

Types of Cards

Debit Card
When you make a purchase with a debit card, money is automatically deducted from your savings or money account. You can only spend the amount of money available in your bank account.

Charge Card
A charge card requires you to pay all charges in full at the end of the billing cycle. It is not a line of credit and no interest is charged.

Credit Card
A credit card allows you to make purchases and pay for them later by using a line of credit extended by a bank. Interest is charged based on the terms of your Card Agreement. Some credit cards require you to pay an annual fee.

Card Ownership

Credit cards are the form of credit most people will apply for and use during their lifetime. It is also the form of credit that people often have the most trouble managing. Once you understand how they work, though, you will be ready to take control.

When you apply for a credit card, you choose the kind of credit you want.

1. Individual credit is only based on your assets, income and credit history. You alone are responsible for paying the bills.
2. Joint credit is based on the assets, income and credit history of both people who apply. Married couples often apply for joint credit. You may obtain more credit this way, but both will be responsible for the debt, in the event of divorce.
3. An authorized user is someone who uses the account with your permission. However, you (and your joint account holder, if any) are solely responsible for the debt.

Read the fine print
Once you have selected a credit card, it is important to read your Card Agreement carefully. It gives you key information about your account: the annual percentage rate (APR), monthly minimum payment formula, annual fee, (if applicable,) and your rights in billing disputes.

All your APRs, including any promotional APRs, may increase, as permitted by law, if you pay us late or make a payment that is not honored.

Credit Limits

When you are approved for credit, the creditor puts a credit limit on your account. This is the maximum balance you can carry and helps keep your credit card charges at a level you can pay.

Each card issuer has its own standards for setting credit limits. Some factors that may affect their decision are:

ü Your monthly income

ü Current debt (other credit cards, car loans, student loans, etc.)

ü Length of residence at your current address

ü Home ownership

ü Number of times you've applied for credit

ü How much credit you need or use

You may ask your credit card company to increase your credit limit, but that answer will depend on your total financial picture. You may qualify for a higher credit limit if your income has increased or your debts have decreased. You may also qualify if you always pay on time, pay more than the minimum payment due, or pay your balance in full.

Fees and Payments

Annual fee
Some credit cards may require an annual fee. This is the yearly cost of owning a credit card. The annual fee may be posted to your balance when you open the account and added each year on the anniversary of your account opening.

Late Fees Late fees are charged when you fail to pay the minimum payment due by its due date. To be sure, your payment arrives on time; mail it at least five to 7 days before it is due. Many credit card companies offer online payments through your checking account. This option is generally much faster than traditional mail and usually posts to your account within 24 hours.

Remember, late fees are avoidable and late payments can harm your credit history, making it harder for you to get credit in the future.

Other Fees
Companies may charge a fee if your balance exceeds your credit limit. You may also be charged fees for returned checks; returned cash advance checks or stop-payment requests.

Account management tools
Most fees, such as late and over-the-limit fees can be avoided. To help manage your credit card accounts, ask your issuer if they offer the following tools:

• Automatic alerts notify you about important account activity such as due date, current balance, or payment notifications. Have friendly reminders about your Citi credit card account sent to your email inbox or phone.

Account Balance vs. Minimum Payment Due

Your minimum payment due is not the same as your account balance. If you assume the minimum payment due is all you need to pay each month, you could owe far more in interest charges than you budgeted.

Account balance
This is your total account debt as of the statement date. It includes any unpaid balance from last month, new purchases since the statement closing date of your last statement and any cash advances you may have taken. The credit card company will also add in any other charges such as an annual fee, interest charges, and other fees.

Minimum payment due
This is the smallest amount of your balance you can pay by the due date and still meet the terms of your card agreement. The minimum payment due is often a specific fraction of the balance, such as 1/36 or 1/48. Some people think that the minimum payment due is the only amount you owe, but you actually owe the full balance. You will owe interest on any portion of the balance that you do not pay.

Changes in minimum payment due
To help card members pay off their debt faster, many large credit card issuers modified their minimum payment due requirements in 2005. This industry-wide change was designed to help customers pay down their balances more quickly. This change may have resulted in an increase in the monthly minimum payment due required for your credit

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