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Youve got to go in circles if you want to go places with credit.
Using credit
is a snap. You buy a jacket or pay for dinner by simply handing over a credit card and signing
a receipt. And then you dont have to pay the bill for several weeks, and you may be able to spread
your payment over months or even years.
But you want to be sure the way youre using credit is better for you than
it is for the credit provider.
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WHOS WHO?
Buying on credit is a process that involves three parties: you, the seller youre buying goods or
services from, and your creditor, the bank or other
institution that puts up the money to make your purchase possible. When you sign a credit agreement or sometimes
simply provide your credit card number you agree that the creditor will cover the bill for your purchase, and
youll pay back the money.
The merchant you buy from also pays the creditor a fee, usually a percentage of the purchase price.
Part of the cost of doing business is making it easy for people to buy and thats what credit does.
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WHATS WHAT?
When you get a credit card, youre arranging to use whats known as revolving credit. That means
you have repeated access to a limited supply of money, known as your
credit limit. As you charge purchases, you use up part
of that credit limit. But as soon as you repay any part of what youve used, youre free to use the amount again
without having to reapply.
For example, if your credit limit on your credit card is $1,000, and you charge $400, youve still got $600
to use. And if you repay the $400 at the end of the month without charging additional purchases, your credit limit is back up to
$1,000 again.
THE PRINCIPAL IDEAS
In return for using borrowed money, called the
principal, for longer than a few weeks measured from the
time you spend the money until payment is due you agree to pay the creditor a finance charge. For credit cards, this
really means the interest that accumulates on any unpaid balance, calculated as a percentage of the amount you owe. Other
charges, like annual fees for the use of the card, or fees for paying late or exceeding your limit, are extra.
In most cases when youre considering a credit agreement, you wont be able to negotiate
better terms with a creditor than whatever the standard offer is at the time. But that doesnt mean you cant
find a good deal. Whenever youre in the market for credit, doing some serious comparison shopping may help you find a
lower interest rate, smaller fees, or some other way to save money.
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VARIATIONS ON THE THEME
A line of credit is another type of revolving credit. Banks and other credit providers sometimes offer
customers a line of credit to make it convenient for them to borrow larger amounts than they might be able to put on a
credit card.
Often, when you have a line of credit, you get a pack of special checks that look just like regular
checks. In fact, you use them the same way as conventional checks, and can write them for amounts up to the credit limit
your lender sets. The difference is that youll get a bill, including finance charges, for spending the money. But
when you repay, you can use the amount again.
You might also have a line of credit that gives you
overdraft privileges on your checking account. If you do, your bank will transfer money into your
account to cover checks you write, up to your credit limit, if your balance is too low. You pay interest on the amount that's
transferred, but you can use the line over and over if you repay what you have used.
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CASH ADVANCES
As useful as credit cards can be, there are times when you need cash. If you dont have
the money you need in your bank account, most credit cards allow you to get cash advances at ATMs. The only thing
is arrange for a personal identification number (PIN), just as you do with an ATM card.
With most cash advance arrangements, you pay a fee for the withdrawal and start owing interest
from the moment you get the cash. And that interest may be charged at a higher rate than you pay on your regular
card purchases. So you may want to use this alternative only in a true emergency. |
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