Be a smartypants about loans
Credit can be kind of tricky to understand. The important thing to know is that poor money habits now can make your life pretty miserable for years to come. This is your chance to start out right!
What is credit?
When someone gives you credit, it means they are willing to loan you money in exchange for your promise to pay it back with interest. Interest is the money you pay to use someone else’s money for a period of time. The higher the interest rate, the more it will cost you to borrow.
Pretty much everyone takes out loans to buy things – especially big items like cars and houses. Of course, it would be awesome if you could just pay cash for everything you need but unless you’re a billionaire, that’s not the way it works. (And if you are a billionaire, we need to start hanging out.)
Interest rates are quoted as an Annual Percentage Rate (APR). The APR is a good way to compare the amount it costs you in a year to use credit.
You should compare interest rates and any fees at several different lenders before you get a loan or credit card. Let’s compare two loans for the same amount, but with different interest rates:
You would pay about $445 more to borrow $5,000 for five years at 12% APR. The higher the amount of the loan, the bigger the difference.
Length of loan
Another key bit of info is the loan term, or how long the loan lasts. The longer the loan, the more interest you’ll pay over that time. Car loans, for instance, are usually made in 3 to 7 year terms. The shorter the term, the less interest you’ll pay – but your payment will be higher too – because you’re paying for the whole amount of the car in fewer payments.
The pesky part of loans is that you have to pay them back. Payments are made each month and you can do it one of several ways:
If you aren’t going to be able to make your loan payment on time, contact the credit union right away. Sometimes we can make arrangements to help you.
Linn Area Credit Union is a fabulous place for a first loan because you’ll get a good interest rate and we’ll work the payments around what you can afford.
Your credit score is important
Lenders use a credit report to help decide if you’re responsible enough to pay back a loan before they grant you a loan. Your credit report shows all credit cards, loans and store charge cards you’ve had, and if you’ve paid your bills on time. It even has information about your employment. It shows your credit history for the past 7 to 10 years.
These credit reports also come with your credit score. This is a number used to rate how good your credit is. The higher the score, the better your credit rating. It’s a fact… if you have a good credit rating it will be easier for you to get a loan and borrow at lower interest rates than someone who has a bad credit rating.
Skipping payments or making late payments (on a loan, credit card, electricity bill, etc.) will bring your credit score down. Some of these slip-ups can do a lot of damage and it will take a LONG time to bring your score up again. This information all goes on your credit report and stays there for years.
Start building good credit now
If you want low interest rates on loans, you have to have good credit. Our advice:
Follow the tips above and you’ll be well on your way to world domination. Well, to at least proving that you are a responsible person who takes repaying their debts seriously. That’s the key to building good credit.