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Credit Basics
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Buying on credit
allows you to take possession of something before paying for it in full,
with the promise that you will pay back the remaining amount over an
agreed-upon period of time along with additional charges, such as
interest. As such, credit can offer you financial flexibility and power.
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Understanding the obligation and responsibility
that comes with using credit will help you build
a solid credit history and expand your financial
freedom. |
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| With a good
credit history, you are able to make purchases many people take for
granted these days — such as borrowing money for a new car, home, or
school tuition. You also use credit to reserve or rent a car, hotel
room, or video. Credit enables you to order products and services by
phone or on the Web. Whether you're just getting started in life, or
you're ready to buy "big ticket" items, or trying to manage your cash
flow wisely, credit gives you the flexibility to make purchases whenever
and wherever you want. For more on the getting and keeping good credit,
you can order a free brochure entitled, "How to Be Credit Smart" from
www.afsaef.org. |
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| As with most services,
credit doesn't come free of charge. By granting you credit, creditors
allow you the flexibility to make certain purchases, and charge you for
this service. How and how much creditors charge you for credit will
vary, but they must disclose these rates to you before you agree to
borrow. You should always review the terms of your credit before
entering into an agreement with a creditor. Typical charges can be
measured in finance charges, the total sum of charges above the borrowed
amount, and annual percentage rate, the cost of charges relative to the
borrowed amount. Understanding these two figures can help you compare
rates of different creditors. Make sure you also take into account how
long you will be making payments. For example, you may get lower monthly
payments at 14% APR over 3 years than if you pay the same APR over 2
years. However, the total finance charges over time will be higher if
you make payments over a longer term. |
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| With open-end credit,
such as credit cards or overdraft checking accounts, where your balance
may fluctuate from month to month, the creditor must also tell you how
they will calculate your balance. These methods includes adjusted
balance method, previous balance method, two-cycle average balance
method, and, one of the most common, the average daily balance method. |
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