Credit basics for first-time users
Important facts on becoming a smart credit consumer
Why is learning about
credit important?
Chances are good that most of us will use credit
throughout our lives. That’s why it’s so important
to learn as much about credit as you can now.
What can credit do for you? Everything from
providing a financial cushion in case of emergency
to improving your chances of buying a house.
Developing smart spending habits now will help
you avoid the mistakes that can lead to long-term
financial problems.
How does a credit card work?
When you use a credit card, you are essentially
borrowing money to buy something now that you
will pay for later. At the end of the month, you
receive a statement that shows your purchases, the
total amount you owe and the minimum amount
you must pay. If you pay the entire amount due, you
won’t pay any interest. However, if you only make
the minimum payment, an interest charge will be
applied to the remaining balance on your account.
Reasons to use credit
Credit can be a very useful tool in managing your
everyday finances, providing a flexible payment
option that can make your financial life easier.
Responsible use of credit cards is also an important
step toward establishing a good credit history,
which will give you financial advantages now and in
the future. Good credit history leads to a positive
credit score, which is typically used by banks and
other businesses to determine if you’re someone
who’s responsible with money. Here are the three
main areas where credit cards offer advantages:
More Options
•A
credit card can help you manage your money.
You can track and adjust your monthly spending
with a simple review of your monthly statement,
which may also help with your monthly budget.
• Credit cards give you more ways to buy things.
They are accepted worldwide, even where
cash and checks may not be accepted, (e.g.
hotels, car rentals, mail or telephone orders
or online shopping).
• A credit card can also afford you a little peace
of mind since you can use it as payment in
emergencies or to cover larger, unforeseen
expenses, such as car repairs, medical
emergencies, new appliances, etc.
Security
• Carrying a credit card offers more security than
carrying cash and it gives you zero liability
protection against unauthorized purchases.*
Financial Freedom
•M
any cards have grace periods that last as long
as 25 days, essentially giving you an interest-free
loan for nearly a month before you have to pay
off your balance. The best practice is to pay
your balance in full each month.
• You can use a credit card to cover short-term
costs until your next payday so you avoid
overdraft fees on your checking or debit
card account.
What’s a credit score and
why is it important?
A credit score—sometimes referred to as your
FICO score—is a widely used calculation of
various factors concerning your credit history and
current credit accounts. Financial institutions
and other companies use your credit score to
determine whether you’re someone who is
responsible with your money (which includes
meeting the terms of your credit card agreement).
Credit scores range from about 350 to 800. A low
score indicates poor credit history and makes
someone a high risk for credit. A high score, which
indicates a good credit history, can give you
many advantages, including better interest rates
and higher credit limits on things like credit cards,
mortgages and other types of loans such as a
new car loan. It also lets landlords know that they
can trust you to pay your rent on time each month.
What factors determine
your credit score?
Factors affecting a positive or negative credit score:
Payment History: Overdue bills or late payments
will lower your credit rating.
Amount of Debt: In general, your non-mortgage
credit payments each month should not exceed
more than 15 percent of your after tax income.
Unused Credit Cards: The credit rating formula
looks at the difference between the amount
of credit a person has and the amount being
used. Closing one or more credit card accounts
reduces your total available credit. This, in turn,
lowers the percentage of available credit, which
ultimately lowers your credit score. The formula
also factors in the length of time your credit accounts have been open. So before you close an
account, talk to your bank or get advice from an
experienced financial advisor.
Number of Credit Inquiries: When you apply
for credit, you authorize lenders to ask for a
copy of your credit report from a credit bureau.
When you check your credit report after such an
inquiry, you may notice that inquiries are listed.
That’s because inquiries from lenders directly
affect your credit score since lenders assume
that multiple inquiries are a sign that you’re
looking for loans, which may make you a poor
credit risk. You can help your credit rating by
keeping credit inquiries to a minimum.
Stay on top of your credit score
It’s a good idea to order and review your credit
report every year. Everyone is allowed to get one
free credit report every year. For a free copy of
your credit report, you can go to
www.annualcreditreport.com.
Otherwise contact these major credit bureaus:
Equifax—www.equifax.com
Experian—www.experian.com
TransUnion—www.transunion.com
Check your report for any inaccuracies and if you
need to dispute errors, contact the reporting
agency to explain the disputed items. You can
request an investigation, send copies of
supporting documents and tell the creditor
that you are disputing an item.
Responsibility and Stability: Staying at one
address and at one job for extended periods of
time (usually at least two years) are viewed as
positive signs.
MasterCard believes that informed consumers are better equipped to
enjoy the financial freedom a credit card offers. To learn more about
credit cards and financial responsibility, MasterCard encourages you to
visit the Learning Center at www.mastercard.com/education
*Conditions and exceptions apply. For further details, see www.mastercard.com/zeroliability
©2009 MasterCard
Seven ways to use
credit responsibly
and avoid getting
into debt
1. Be sure to check your
monthly statement to see
if all charges and payments
have been reported
accurately
2. Only purchase items you
can afford to pay back in
a reasonable amount of
time; if you know you
can’t afford something,
don’t buy it
3. Do not exceed your credit
card limit
4. Pay more than the
minimum due if you can.
You’ll reduce the time it
takes to repay your credit
card debt and save money
by paying less interest
5. Keep unpaid balances
low—borrow only what
you can repay in a given
time period
6. Do NOT miss a payment or
pay late. If you do, you’ll
be charged fees and
additional interest
7. Know the interest rate on
your card and read the
terms and conditions of
your account to familiarize
yourself with all possible
fees, such as those applied
for cash advances