With the bad rap that credit cards have gotten, you’d think that they’re pure evil. While credit card use has the ability to destroy reputations and credit, responsible credit card use can actually help you establish good credit. That probably sounds a bit crazy, but it’s actually true. If you use your credit cards responsibly, you are showing perspective lenders that you are a good, reputable person to loan to. As a result, they’ll be willing to give you loans at good interest rates.

One of the pitfalls with credit cards is that most people do not know how to responsibly use them for the right reasons. Thus, they fall into deep debt which harms their credit. You’re probably wondering “how can I avoid this pitfall?” Well, it’s actually pretty easy, provided you are able to use some self-control when reaching for the credit card. We’ll give you seven easy, quick tips for making sure you use those credit cards the right way.

Tip #1: Never Charge More Than You Can Afford

This seems like an obvious tip, but it’s something that most people do not follow. Often times, when we are given a piece of plastic that enables us to charge thousands of dollars and not have to pay that back for a certain amount of time, we are tempted to charge as much as possible. Even if we can’t afford to pay for all the stuff we charge, we still do it because it feels great to buy things. Indulging makes us happy. However, once you receive the first bill and realize you cannot afford it, you are often shocked and unsure how you’ll be able to pay it.

How can you avoid this? By simply not spending more than you can afford! Before you go to charge anything, think about the purchase. Is this something you can afford to pay for within a month or two? If not, do not purchase it.

Tip #2: Pay Back the Entire Balance at the End of the Month

For years many financial experts have recommended this obvious tip. Despite how well-recommended it is, many people neglect to do it. Carrying large debt balances from month to month, even if the payments are made on time, is bad for your credit. That’s why paying off the entire balance at the end of each month is so crucial—it lets creditors know that you are serious about paying back any debt you may incur. To make this tip really work for you, you must make use of tip #1 which is to not overspend. If you spend more than you can afford to pay back in one month, you will not be able to pay it all back at the end of the month.

Tip #3: Never, Ever Use Your Credit Cards to Pay Off Other Debts

A lot of people who cannot afford to pay one bill may use another credit card to pay it. This is really destructive behavior, as it only puts you further in the hole. Even though it may seem like a good idea at first, the debt always catches up to you and it is often worse than the first time. So do not ever use a credit card to pay off another bill, as it will only harm your credit rating and put you even closer to going bankrupt.

Tip #4: Keep Track of All Credit Card-related Purchases

When you use your credit cards to make a purchase, be sure to save every single receipt. This allows you to see how much money you have spent before receiving the monthly statement. It also allows you to potentially spot any errors the credit card company could make in regards to your billing statement. Finally, it holds you accountable—just seeing how much you’ve spent in the past day or week can prevent you from making purchases that you cannot afford.

Tip #5: Always Pay Before Due Date

One of the huge mistakes many people make is to not pay their credit card bills on time. As a result, late fees begin to accumulate, making it even harder for credit card holders to pay back their debt. The simple way to avoid this problem is to pay your bills before the due date—if possible, send out the money a week before the date, so that there is adequate time for the money to reach the company. Doing so prevents late fees from ever happening.

Tip #6: Don’t Use Credit Cards for Every Single Purchase

It is tempting to abandon cash and checks and use credit cards for most, if not all purchases. However, this really isn’t a good idea. You have to remember that on every purchase you make, there is an interest rate. If you’re spending $25 on a t-shirt and use a credit card to pay for it, you may actually be paying $35 on the shirt once interest is factored in. For one item, this may not sound like much. But if you do this several more times, the money begins to add up. That’s why you should avoid using credit cards for every purchase. Try to use credit cards only when absolutely necessary.

Tip #7: Before Making a Big Purchase with a Credit Card, Think About It

Before making a big purchase using a credit card, most responsible credit card users take the time to think the purchase through. They may ask themselves the following questions:

1. Can I afford to pay this back within a month or two’s time?
2. Do I absolutely need this item right now?
3. Would it be better for me to simply wait a month or two to save the cash and pay for the purchase with money and not a credit card?

The answers to the above questions will tell you whether or not you should use a credit card to purchase the item in question. If you can afford to pay it back within a month or two’s time and need the item now, charging is probably a good idea. If not, you should simply wait and save your money to purchase the item without the use of a credit card.

By applying the above tips to your credit card use, you can become a responsible credit card user. Good luck!

You’ve probably seen those commercials which state that you can consolidate your debt into one easy payment each month. It sounds like a great deal, right? Well, that’s certainly the case for some people, but debt consolidation isn’t the ideal solution for every situation.

Here we take a look at how debt consolidation works, its benefits and disadvantages.

When a lot of people enter into or consider debt consolidation, they really don’t understand how debt consolidation programs work. They assume that it’ll fix every problem for them and that they won’t have to worry about the debt, which isn’t the case. That’s why anyone who is even remotely considering debt consolidation programs should arm themselves with all necessary information. In this article, we’ll cover the basics of how debt consolidation programs work.

Debt Consolidation – The Basics

Debt consolidation is not at all like debt management plans. That’s because with a debt management plan, a credit counseling agency contacts the creditors and gets them to lower interest rates. Then you give money to the credit counseling agency and they disperse it to creditors. That’s not the case with debt consolidation.

With debt consolidation, you are essentially taking out one big loan and then placing all your other loans on this loan, thus creating one big loan which has to be paid off. Depending on the interest rates of your debt, this can be quite beneficial—if you can get a big loan with a fair interest rate. You’ll be paying one big monthly payment each month which takes care of your debt for that month.

So, to sum it up, you’ll be transferring all your debt to one loan and then repaying that.

How Does It Work?

You’ll have to first find a financial institution that offers debt consolidation. Don’t think, though, that they will grant you a huge loan without anything being done on your part. You’ll have to put up some sort of collateral to make the deal worth their while. This collateral usually comes in the form of a house.

Once you secure a loan, they’ll basically put all your debt on the loan and they’ll tell you how much to pay each month for the loan. How much you pay depends on the interest rate, time and total amount of debt.

Should I Consider Debt Consolidation?

There really isn’t a one-size fits all answer to this question. Who should and shouldn’t consider debt consolidation depends on the situation. Before considering debt consolidation, you should ask yourself the following questions:

• Is it best for me to get a loan than to pay off the debt on my own?
• Have I looked into alternate methods of paying off my debt like debt management plans? Would these plans be a better fit for me?
• Am I comfortable with the possibility of losing my home if I miss a payment on my debt consolidation loan?
• Am I OK with potentially hurting my credit by getting a debt consolidation loan?
• Have I fully researched debt consolidation loans and do I know the possible harmful effects of them?

If you’ve carefully and thoroughly gone through the above questions and still feel as though you should go with debt consolidation, then it’s time to go over the benefits and hazards of debt consolidation.

Benefits of Debt Consolidation Programs

If you have several credit cards, it’s probably hard for you to remember to pay each one every month. In fact, it can be downright impossible to get everything straight month after month. The bills seem to just keep piling up and you’re overwhelmed by it.

Debt consolidation can change all this. It can consolidate all your bills into one easy to remember monthly payment. It’s very convenient.

Another benefit to debt consolidation, besides the convenience, is that it can actually take care of your debt in a quicker time than you could by paying it off by yourself. That’s because you can usually get a debt consolidation loan with an interest rate of between 3% and 10%. Considering the fact that most credit cards feature rates of 10-25%, debt consolidation can result in big savings and a quicker repayment time.

Debt consolidation loans can also be pretty flexible. Depending on the financial institution, you may be able to set up the loan so that it can be repaid over a set period of time. This allows you to somewhat tweak the loan depending on your unique situation.

Hazards and Pitfalls

Just like the song says, every rose has its thorn. Debt consolidation, while a great solution for some, has its downsides. The most obvious downside is that you’ll have to put up collateral, such as a house and vehicle. If you miss even one debt consolidation loan payment, you risk having your house taken away from you. That’s a huge risk.

Another bad thing about debt consolidation is that it initially negatively affects your credit score. That’s because you are taking out a huge loan (and taking out a loan always initially hurts your score) at one time. Even after you’ve paid off your loan, it’ll still show up on your credit report for a period of time and potential lenders may be inclined not to grant you credit if they see that you had to resort to a debt consolidation program to pay off your debt.

Where Can I Get a Debt Consolidation Loan?

Many financial institutions (banks, credit unions etc.) offer debt consolidation loans. If you want to get the best possible deal on your loan, you should try several different places.

At first, you’ll want to go to your local credit union or bank. You can ask them what they offer in the way of debt consolidation loans. Also ask what kind of interest rate they would give you, as well as the repayment plan and what collateral is necessary. One tip is to go to a bank or credit union which you are not a member of. They may give you an excellent interest rate in order to win your business.

The online banking market is extremely competitive, so you’ll also want to look online for debt consolidation programs. You may be able to get an even lower rate online than you could by going to a local bank or credit union. Just make sure to do a lot of research on any online bank to make sure they are legitimate and won’t scam you.

There are numerous ways to accumulate debt, including basic loans, syndicated loans, and bonds. Debt, especially large sums of debt, can also be safeguarded through a mortgage or other security interest over some of the debtor’s property, in which case the creditor will have some rights to that property in the event that the debtor becomes unable to repay the debt and defaults on the loan. Default occurs when a debtor has not met its legal obligations to a debt contract, such as not making a scheduled payment, or violated a condition of the debt contract.

Basic Loan

A basic loan is the simplest form of debt. It consists of an agreement to lend a base sum of money for a fixed length of time, which must be repaid by a certain date. In commercial loans, interest, calculated as a percentage of the principal sum per year, will also have to be paid by that date. There are two types of basic loans. They are Secured and Unsecured. These types are discussed in better detail below.

Secured

A mortgage is a common debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In some instances, the car itself may secure a loan taken out to purchase a new or used car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter, often corresponding to the life of the car.

Unsecured

These may be available from financial institutions under many different guises or marketing packages such as credit card debt, personal loans, bank overdrafts, credit facilities or corporate bonds. The interest rates applicable to these different forms may vary depending on the lender and the borrower, and any terms the two worked out. These may or may not be regulated by law.

Syndicated Loan

A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan. In such a case, a syndicate of banks can each agree to put forward a portion of the principal sum.

Like insurance, a loan is an assumption of risk. For a certain class of loan, with certain rules, the bank might believe that it is likely that 10% of all borrowers may go bankrupt. If the banks guess that the cost of funds is 10%, it will charge more than 20% interest on the loan to make an attempt at profit. In general, banks and the financial markets use risk-based pricing, charging an interest rate depending on the risk of the loan product in general or the risk of the specific borrower. The problem with larger businesses loans however, is that there are fewer of them.

Therefore, if the bank only has one large business loan, if that business happens to be one of the 5% that defaults, then the bank loses all its money. For this reason, it is in the best interest of all banks to split, or “syndicate” their large loans with each other, to prevent the risk of one single bank taking the fall of lost profit singularly, but to also share the wealth of increases and gains in its interest rates. To avoid the borrower having to deal with all syndicate banks individually, one of the syndicate banks usually acts as an agent for all syndicate members and acts as the mediator between them and the borrower.

Bonds

A bond is a debt security issued by certain institutions such as companies and governments. It is a certificate of debt (usually interest bearing or discounted) that is issued to raise money; the issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal.

A bond entitles the holder to repayment of the principal sum, plus interest. Bonds have a fixed lifetime. Bonds are generally issued for a fixed term longer than ten years with long-term bonds that last over 30 years being less common. At the end of the bond’s life, the money should be repaid in full.

Interest may be added to the end payment, or can be paid in regular installments throughout the life of the bond. Bonds may be traded in the bond markets, and are widely used as relatively safe investments in comparison to stocks. Other stipulations may also be attached to the bond issue, such as the obligation for the issuer to provide certain information to the bondholder, or limitations on the behavior of the issuer. U.S Treasury securities issued debt with life of ten years or more is a bond.

New debt between one year and ten years is a note, and new debt less than a year is called a bill. Elsewhere in the market, this distinction has disappeared, and both bonds and notes are used irrespective of the maturity. Market participants normally use bonds for large issues offered to a wide public, and notes for smaller issues originally sold to a limited number of investors.

There are no clear demarcations. Bonds have the highest risk, notes are the second highest risk, and bills have the least risk. This is due to a statistical measure called duration, where lower durations have less risk, and are associated with shorter-term obligations. Bonds and stocks are both securities, but the difference is that stockholders own a part of the issuing company, whereas bondholders are in essence lenders to the issuer. In addition, bonds usually have a defined term, or maturity, after which the bond is redeemed whereas stocks may be outstanding indefinitely.

Hopefully, knowledge of these different forms of debt accumulation can and will help you better understand how the debtors system works, and better prepares you for how you can remain in good credit, or recover from a fall in credit history.