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Types of credit

First things first, credit is a type of loan called a consumer loan.  These consumer loans come in two basic types, secured and unsecured.  

A secured loan means you’ve put up some sort of collateral.  Collateral is what you lose if you don’t pay the lender back.  So, if you have a car loan and don’t make your payments, the car is collateral, and your lender has the right to send someone over and pick it up.   

For an unsecured loan, your signature is enough to get the loan, if your lender thinks you’re an acceptable credit risk.  Credit cards are a type of unsecured loan.  You can pay off your balance in full each month, or pay it off over time – but you’ll be charged interest if you carry a balance from month to month. 

For some loans a lender might require a co-signer – someone, like a parent, who promise to repay your loan if you don't.  This is pretty common for young people because you have a limited credit history, and lenders want some assurance they'll get their money back.

Credit isn't free

Believe it or not, people won't give you money for free – and the rates they charge can vary wildly.  If you're shopping for a loan or credit card, it pays to compare.  Check with your credit union www.jscfcu.org  or websites such as http://www.bankrate.com/ for going rates.  When you go looking, watch for these things:

Annual percentage rate (APR): This is the standardized interest rate you must pay the lender each year you're using their money.  The lower the rate, the better, but be sure to see if the good deal you found is only temporary – a 5% APR sounds great, but not if it'll go up to 20% after 12 months.

Finance charge: This is the total dollar amount the loan will cost you.  It includes fees, interest, or other charges.  If you carry a balance on your credit card, the finance charge will show up on your statement every month.

Loan maturity: This is a length of your loan.  A car loan might be 36, 48, or 60 months.  A longer loan period means smaller monthly payments, but you'll pay more in interest.

Grace period: This is the time period you're given to pay the bill without getting hit with interest.  Your credit card might have a grace period of 20 to 30 days on new purchases, but if you carry a balance or make a cash advance, you might get charged interest right away.

Take it from us

A good credit rating takes a while to build, but not long to ruin.  What's worse is that negative information can stay in your record for up to seven years.  If you declare bankruptcy, that'll stay on your record for ten years.  Making a late payment just once to some credit cards can send the interest rate sky high, plus they will probably charge you a late fee.  This late payment may also be reported to one or all three credit bureaus, so be careful when using credit cards. 

Stay on top of your payments or you could pay way more than whatever you bought was worth.  Not to mention, your lender could also lower your credit limit or even cancel your card. Credit comes with a lot of fine print, and it can be confusing – when you have questions, keep asking until you get the answers you need.  Limit the number of cards you hold – you don't need a credit card for every store you shop at, even if they sweeten the deal with free gifts. 

Pay off the balance each month, or at least as much of it as you can.  Sending a check for the minimum payment each month will trap you with payments for years, or even decades.

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