Introduction

In today’s world, credit does indeed matter. In fact, obtaining and using different types of credit instruments is part of almost every American’s financial life. However, because it is so easy to make expensive mistakes that can follow you for a long time, it is a good idea to learn how to borrow wisely from the beginning. This program will cover the core concepts of credit usage, including:

• What is Credit?
• Getting Started
• Using Credit to Your Advantage
• Delete Your Debt
• Consumer Rights and Responsibilities

Chapter 1: What is Credit?

In the broadest sense, credit means having the use of something before you pay for it. It adds flexibility to planning and makes it possible to pay for expensive items over a period of time. Credit comes in many different forms and it is important to understand how each works so you can obtain the right type for your needs.

Secured Credit
This is commonly used to purchase a large item such as a home, car, or appliance. An asset (most often the item purchased) called collateral secures the loan. If you do not keep the monthly payment arrangement, the creditor has the right to reclaim the collateral. There are two types of secured credit:

• Secured/Closed-end. With a secured/closed-end credit instrument, you put down an initial deposit, and the item you purchase is taken as collateral for the loan. The remaining balance is calculated into equal installments that you repay over a specific period of time. An example would be a car or boat loan.
  
  
• Secured/Open-end. Secured/open-end credit is usually a type of revolving credit that is secured by collateral that you put down to secure the loan. It can be repaid in a single payment, equal payments, or unequal payments. A home equity line of credit is an example of secured, open-end credit.

Unsecured Credit
This is credit extended without collateral (security). Because of the higher risk to lenders, unsecured credit generally carries a higher interest rate than secured credit.

• Unsecured/Closed-End. Sometimes referred to as signature loans or personal loans, the repayment is made in equal, monthly installments. An example is a debt consolidation loan.
  
  
• Unsecured/Open-End. The lender sets a credit limit and the borrower may use up to that amount. The initial agreement states the terms of repayment and the credit limit. Bills are issued monthly and the minimum payment due is based on the balance and terms. Credit cards are the most common form.

Credit Cards
There are several types of credit cards on the market:

• General-purpose credit cards can be used virtually anywhere.
  • If you have both an excellent credit history and a high income, you may be offered a “premium” card (sometimes called Gold or Platinum), which comes with a high credit limit and enhanced customer service.
  • Some credit cards offer points, rebates, or cash-back rewards where the more you use them, the more benefits you receive.
    
    
• Retail cards may only be used at a particular retail establishment, such as a department store or gas station.
  
  
• Small business cards offer special perks to business owners and their employees.
  
  
• Student cards generally offer lower credit limits and special benefits for students.

Charge cards
A charge card is similar to a credit card, but you have to pay the entire balance in full each month. The credit limit is often very high or even unlimited. Charge cards usually come with higher annual fees than credit cards because no interest is charged. If you cannot make a full payment, a high rate of interest is assessed and late fees are charged. Collection action can be swift and severe.