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Understanding and Using Credit

Credit is a convenient financial tool. If you use credit, it is critical to understand how it works and know the reality and responsibility of repaying your debt.

Credit Dos and Don’ts


  • DO shop around. The credit card industry is very competitive, so compare interest rates, credit limits, grace periods, annual fees, terms and conditions.
  • DO ask questions. If you don’t understand something, ask.
  • DO set a budget and stick to it. Developing a financial plan will help you keep your finances in order.
  • DO be wary of anyone who claims they can “fix” your credit. The only thing that can fix a credit report is time, and a positive payment history.
  • DO open your bill and pay it on time every month. This helps you avoid late fees and keeps your credit history — and credit score — good. It also helps protect you from identity theft and unauthorized charges.
  • DO pay at least the minimum due. Paying above the minimum due is a much better idea, and making a plan to reduce the level of debt is better still.
  • DO contact your credit card issuer if you have trouble making payments. The issuer may work with you to create a payment plan you can more easily manage.
  • DO be careful with your credit card. Keep it secure. Always have your card issuer’s phone number available in case your card is lost or stolen.
  • DO view credit as an investment in your future. By using credit wisely, you can build a good credit history. This allows you to rent an apartment, get a job, purchase a car and buy a home.
  • DO order a copy of your credit report annually. Your credit report is like an academic report card — it evaluates your performance as a credit customer. It needs to be accurate so you can apply for other loans.


  • DON’T feel pressure to get a credit card if you don’t want one. A credit card may not be right for you. Don’t be afraid to say “no” to salespeople. It’s ok to walk away.
  • DON’T open many credit accounts in a short period of time. It will hurt your credit score and may make credit more expensive.
  • DON’T pay your bills late. Late payments can hurt your credit rating and a late fee will be charged.
  • DON’T spend more than you can afford. A credit card is not magic money; it’s a loan with an obligation to repay. Realize the difference between needs and wants. Do you really need that CD or pizza? If you charge these items and only pay the minimum, you could be paying for those items months from now.
  • DON’T reach your credit limit or “max out” your cards.
  • DON’T apply for more credit cards if you already have balances on others.
  • DON’T ignore the warning signs of credit trouble. If you pay only the minimum balance, pay late or use cash-advances to pay daily living expenses, you might be in the credit danger zone.
  • DON’T give out your credit card number unless you’ve initiated the transaction. Be alert to identity thieves and scam artists.

A Few Things You Should Know About Credit

Borrow only what you need and what you can afford to repay.

Before you consider what kind of credit to use, you should determine whether you should use credit at all. Ask about the annual percentage rate (APR) of interest charged, if the interest rate is variable, and what fees are charged, if any.

Installment Loans and Lines of Credit

  • Installment loans: These are loans that give you a lump sum of money up front, repayable in steady monthly payments with predetermined repayment terms, such as a fixed interest rate. Car loans and mortgages are installment loans, for example.
  • Lines of credit: These allow you to borrow money up to a certain amount any time you want and generally offer flexible repayment terms. Credit cards offer a line of credit. With both types of credit, the maximum amount you can borrow, or credit limit, depends upon your credit score, income, and other factors that determine your ability to repay.

Secured Versus Unsecured Loans

  • Secured credit is backed by property you own. For example, a car loan is generally secured credit. If you fail to pay your car loan as promised, the creditor has the right to take your car. This is also the case for home equity loans and mortgages, which are tied to a house. Secured credit is usually less expensive than unsecured credit, but you should carefully consider whether you can afford to lose the property you use to secure the credit in case you experience difficulty paying back your loan.
  • Unsecured credit, like that offered by credit cards, will usually cost more, but will not place your personal property at risk, except under certain circumstances (e.g., if you file for bankruptcy). Borrowing money is a serious undertaking that comes with important responsibilities.

Loans are Contracts and Carry Important Responsibilities

  • Understand your responsibilities. Just like with any contract, you need to understand the responsibilities and the consequences if you fail to meet what’s required of you. Even a few missed or late payments can affect your credit record and make it harder to get loans in the future and make them more expensive.
  • If you find yourself having difficulty repaying your loans, you should act right away to address it. The worst mistake people make is ignoring the problem or hoping it will go away. It won’t. Dealing with it early is the best course of action. Below are some warning signs of problems. If these sound familiar, look at the next section for ways to get your finances in order.

Identify the Warning Signs

If any of these reflect your financial situation, you may need help to manage your finances:

  • Making only minimum payments month after month, or skipping payments.
  • Making late payments.
  • Borrowing money to pay your bills.
  • Frequently using cash advances from credit cards.
  • Applying for new credit to pay off existing credit cards.
  • Having little or no cash for your needs.

Financial Stress Test

Click the button below to view and print a financial stress test worksheet.

Print Form

What to Do If You Need Help

Getting in over your head is stressful.

If you run into financial trouble, the first step is to address it immediately. Ignoring the problem will only make the situation worse. Getting organized and creating a budget is an excellent start. However, if a more immediate solution is called for you should:

  • Contact the creditors whom you are having difficulty paying. Creditors are often the best source of short-term help and can help you avoid blemishes on your credit report.
  • Pay cash.
  • Set a monthly limit on charging, and keep a written record so you do not exceed that amount.
  • Consider a lower interest debt-consolidation loan. If you qualify, combining your credit card debts into a single, lower-interest secured loan can make paying your debt down easier and free up money for living expenses. However, be careful. Consolidating your debt is only beneficial if the resulting loan terms are favorable and if you stop using additional credit.
  • Contact a local certified credit counseling service if you continue to experience difficulties. The staff at Consumer Credit Counseling Service (800-388-2227), for example, can help you prioritize your needs, sort through your debts, and establish a more affordable payment plan with your creditors.
  • Avoid scammers who promise to “fix” your credit. Getting back on your feet takes time. There is no “quick fix” and no one — payday lenders or loan sharks — can make your debts simply disappear.
  • Know your rights as a debtor. Bill collectors must follow certain rules, which are enforced by the Federal Trade Commission (FTC).
  • Do not take bankruptcy lightly. Filing for bankruptcy has long-term consequences that you should carefully consider before proceeding. Bankruptcy is not a quick or casual solution for anyone.

© Copyright 2006 American Bankers Association, 1120 Connecticut Ave NW, Washington, DC 20036. All rights reserved.

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