The first time I had truly engaged in credit was on my first day of college.  I’m sure you remember the same thing….On the first day, I went to the North Carolina State University Bookstore to purchase my books.  But before I even got to the books, I had to stand in line for a couple of hours at the Financial Aid office, in order to have money to buy the books.  The money from the Financial Aid office was in the form of Pell Grants and Stafford Loans.  So after I received my funds, I was able to get my textbooks.

After finding the books, and purchasing a few NC State polo shirts from the bookstore, I headed back to my dorm with a couple of bags.  As I got to the dorm and pulled the books out of the bags, I noticed a few small folded envelopes and postcards asking me to apply for a credit card.  I remember the words “low interest” or “no interest for 6 months”.  Coming right out of high school, we didn’t have a class about finances, how to manage money, or what “credit” really was.  So being a college freshman, I was about to lose before I could win in this “credit” game.  So I had applied for a couple of cards, thinking it wasn’t that big of a deal.

Looking back now, I see how credit card companies can take advantage of your lack of knowledge, and college students seem like easy prey.  But sadly, tons of people have at least one credit card..but most have three or more with maxed out balances.  We rarely think about the impact of a 25.99% interest rate on a $1,000 credit line, but it’s impact is significant.  Take these high interest rates, and add in the state of the economy, and you’ll understand why so many are stuck and find it difficult to get out of the credit card whole (without taking out another loan to pay the credit cards off).

I’ll be speaking on credit and how to manage money in my upcoming “Wealth” articles, so stay tuned.  And of course credit cards are just one piece to the “credit” puzzle.  Credit basically is a resource borrowed from another entity, with unsecured credit leveraging your signature as “promise” that the amount you have borrowed will be paid back.  The argument, on the creditors side, is that the interest rate charged is their way of being compensated for the “risk” of giving you this credit and financing the outstanding balance each month.   What determines how high or low the interest rate, is not necessarily what your credit score is (which I’ll also be discussing at a later date).  It’s really the type of credit being granted that determines the interest rate’s range.  Unsecured vs Secured credit.

Since unsecured credit does not have any collateral to support the loan, the interest rate tends to be higher.  Credit Cards fall under this category, and this is why most traditional credit cards have a higher interest rate than, say, a car loan.  The only collateral offered on an unsecured credit card application, again, is your signature.  Your signature is your promise to repay the loan, but the creditors can’t really repossess your signature if you default on a loan (but they will try to ruin your signature by destroying your credit score) .  So they would rather have you pay as much interest as possible with each month that passes where you do not pay off your outstanding balance in full.  Secured credit, such as a car loan or Home Equity Loan, tends to have lower interest rates, obviously, because the are “secured” by collateral that can be acquired if the loan is not repaid.

I want you to hopefully take advantage of this information so that you will not become a statistic in this “credit” game.  If used wisely, credit can be an effective tool in your money management goals.  But the true concept about credit should be, in my opinion, “can I pay in cash what I would charge on my card?”  If you can’t pay cash, then you can’t afford it…so don’t charge that item to your card until you can pay cash.  But again, hopefully I can give you some jewels to use credit in a way that won’t dig you in a deep whole that will take decades to get out of.  I’ll be discussing facts and figures, but most importantly, the ins and outs of this credit game so that once you understand the nuts and bolts, you’ll begin to understand so many of the “why” questions that exists beneath the surface.  Once these questions are answered, this will hopefully help you further make smart decisions when choosing credit.

And just so you know, I actually have some thorough credentials in the banking world, so most of the information will be from my own expertise over the years.  “Corporate Floe” in full effect!!!  lol

If any of you have any advise, comments, or topics you would like to see discussed in future posts, please leave them in the comments!  Peace and Respect!