Credit: How to get it and what are the pitfalls

ILLUSTRATION BY MATT MAEDA

ILLUSTRATION BY MATT MAEDA

Having access to credit makes modern life much more convenient. Credit cards have a number of different uses: buying dinner for friends and family, travel arrangements, big-ticket items and any unexpected expense that may come up.

In all of these cases, you don’t need a wad of bills; all you need is that piece of plastic.

But credit card usage is also an implicit contract. You are taking out a loan with the creditor issuing the card. The creditor is willing to loan the money, but it does want to be repaid, preferably with interest. Interest is the price of money borrowed now that will be repaid later. If the creditor feels that you are a bad risk (in terms of paying the money back), it will charge a higher rate of interest or give you little or no access to credit.

A creditor will estimate your risk of paying the money back by looking at your credit report and assigning you a credit score. A credit report summarizes an individual’s transaction record, which creditors use to evaluate the likelihood that the individual will repay future loans. The credit score is a number that measures the risk of the borrower not being able to pay back the money.

The credit score is issued by one of three credit bureaus (Equifax, Experian and Transunion Corporation). When a borrower has a higher credit score, (max of 750), there is a greater the likelihood that the borrower will repay the loan in a timely manner. Individuals with high credit scores will have access to more credit with lower interest rates.

So, do you want to get access to credit and/or credit cards? What if you have no credit history? Can you still get access to credit cards? Consumer advocates say that if you have no credit history, the best way to establish that history is to become an authorized user on a family member’s account.

That way, you are establishing a credit history, which will help in establishing credit for yourself. The CARD Act of 2009 prohibits financial institutions from offering a credit card to anyone under 21 unless they can demonstrate their ability to make payments or have a willing co-signer.

Now getting a credit card is one thing; responsibly using it is another thing altogether. I always make sure to pay my credit card in full each and every month. Otherwise, I am paying interest (lots of it) to the financial institution issuing the card.

Making the minimum payment on a credit can saddle you with years of debt because the interest is compounded (interest on interest). If you cannot pay the bill in full, then at least make more than the minimum payment on your credit card bill each and every month.

As with all of life’s pleasures, moderation is a good thing. This is especially true with the use of a credit card. Do not use it more than you can afford to use it.

Paul Briggs teaches economics at Windward Community College. He will be writing a financial literacy column for Ka ‘Ohana. He can be reached at pbriggs@hawaii.edu.

 Do you think a financial column could benefit Ka ‘Ohana readers?

“A column on financial literacy would be an asset to everyone if it has the right tips to go by. I pay my bills weekly such as credit cards, mortgage and car loan. I read years ago that for every payment you make, the interest has to restart accruing from the payment you recently made. I have tried this strategy with my last car to see if it worked and it sure did. I saved on the interest on the loan and paid my car off a year earlier than planned. So, for example, if your loan amount that is due is $200, if you pay $50 a week or $100 every other week you’ll save on the interest part and pay towards the principal at the same time. Just make sure that the payments are set up to post before the due date to avoid any late fees! I even do it on my mortgage so now instead of a 30-year loan, it’ll be paid in 17 to 18 years. This tip is so awesome I wish I knew of it earlier in life but I’m glad that I can share it with others.”
—Natasha Edwards

“I think that this is a great idea for Ka ‘Ohana to start a column on financial literacy. This is actually my second try at college, and I wish that the first time I knew more about how student loans worked and had more guidance on how to repay them, etc. I know that the financial aid office here at WCC is excellent though, so having them there to help is a great asset. I also think that kids coming straight out of high school should also have more knowledge on how to start saving for their futures, i.e. IRAS or investing in stocks. Knowing how to start saving to repay student loans would also be helpful.I know a lot of students end up taking more money than they need to and at the end of their college careers are in way over their heads in debt. Learning how to start putting money aside before you finish school will help tremendously.”
—Kaleene Hernaez