Credit and Debt

Credit gives extra punch to your purchasing power; but reckless handling of credit can bury you in debt.

Seems like everyone wants to lend you money. Each year, credit-card companies bombard American consumers with alluring offers of easy money. “Congratulations—you are qualified to receive $10,000!” “You will not be turned down!” “Why postpone your dreams? Apply today.”

Why do they want to lend you money? Because that's how they make money. Banks and other financial institutions lend money to both businesses and consumers. Borrowers, in return, pay fees, and those fees can be hefty. If you must borrow—for a car, for college, or for other expenses that you lack the cash to cover—learn how to borrow wisely.

Are You Credit Worthy?

Loans, credit cards, and other methods of deferred payment are known as credit. For a bank or other institution to extend you credit, it must be confident that you will repay all the money you borrow, plus any additional interest and fees. You, on the other hand, must understand what you're getting into before you sign on the dotted line.

Creditors, the folks who lend you money, aren't going to give you money just on your word. They are going to ask many questions about your financial past and demand evidence of your financial health to determine if you are able and willing to pay them back.

The Four Cs Creditors look for capacity, capital, character, and collateral when judging your credit worthiness. Capacity is your ability to repay the debt. Creditors will want to know where you work, how long you've worked there, and how much money you make. They will also want to know how much you spend. Capital is your regular income plus the money in your savings and checking accounts.

Character is your willingness to repay your debts. Creditors will obtain a record of your past borrowing, your bill-paying habits, and your ability to live within your means. Much of this information they will obtain from an organization called a credit bureau. If you fail to maintain a good credit rating, you will find it very difficult to obtain credit. Creditors will also look for signs of stability in your life. How long have you lived at your current address? How often have you moved in the past few years? Do you own or rent your home?

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