Understanding How Credit Works
One aspect of reviewing qualifications for a Habitat house involves money: how much you earn, and how much you spend. In terms of how much you spend, your credit report is important to us. Why? Habitat wants home ownership to be a blessing rather than a burden. If more than 41 percent of your income is spent on housing and payments on debt, home ownership MAY be a burden for you.
So let’s understand a few things about the credit-granting industry.
Although there are many lenders that seem to promise easy credit, there’s no such thing as a “free lunch.” If it sounds too good to be true, it probably is too good to be true.
When you evaluate an offer for credit, pay attention to the following things.
- Annual Percentage Rate (APR). The APR is the interest rate charged for the year. The APR charged by many lenders is more than 20 percent. Sometimes the lender lists a “daily” rate or a “monthly” rate as well, and these often seem quite reasonable. However, the annual rate is important because it tells you the true cost of borrowing money. Unless the creditor receives full payment of whatever you charged by the date it is due, your next monthly statement will include a “finance charge.” The finance charge is the cost of borrowing money for that month.
- As an example, let’s say you bought something on credit for $100 and didn’t pay it off for one year. If the lender charged you an APR of 20 percent, the true cost of your purchase would be $120. Let’s look at this a different way. If a bank guaranteed me a 10 percent rate of return, I’d put all my money in its savings account. Why? Because I think a guarantee of receiving $10 for every $100 I invest is a good deal. So if you’re paying a lender 20 percent, you’re making that lender rich!
- Credit Line or Credit Limit. This is the amount of money you’re allowed to “borrow” from that lender. Many lenders offer you a low credit line of, say, $200 or $300. When you borrow more than that amount, the lender will charge you an “over limit” penalty that is quite high. In other words, when you want to borrow, or charge, more than your credit limit, the lender doesn’t say “no.” The lender simply charges you a premium for exceeding your credit limit.
- Late payment penalty. When you take out a loan or borrow money, the lender sends you a bill indicating that you must pay by such-and-such a date. If payment isn’t received by that date, you will be charged a late payment penalty. That penalty is usually quite high.
- Minimum payment due. In order to remain in good standing with a lender, your bill will always list the “minimum payment due.” If you compare the minimum payment due with the finance charge for the month, you will be able to tell whether you’re simply paying the lender or reducing your debt. In other words, the minimum payment due may not include much, if anything, to reduce the amount originally charged.
- If you pay more than the minimum this month, some lenders may say that you don’t have to make a payment next month. However, if you don’t pay off your debt in full, you’ll still owe the finance charge.
A Real-Life Example
Ms. Smith has a credit card with a credit limit of $500. She had charged all but $10 of that limit last month. This month she charged an additional $75. In other words, she charged more than her credit limit allowed. So the lender charged her $29 for that.
Although she should have made a payment by the 10th of the month, she didn’t pay on time. So the lender changed her another $29 because she didn’t pay by the due date.
And because she didn’t pay the full $565 by the due date, there was a “finance charge” of $8.80 that was based on an APR of 21.42 percent.
Although the minimum payment due was only $17, Ms. Smith sent the lender a check for $84. What did that $84 check pay for? Almost $67 of it paid for charging more than the credit limit, making a late payment, and finance charges. In other words, only $17 of her payment was applied to her balance of $565.
What can you do about this?
If you are concerned about your credit status, we recommend two organizations that assist people trying to resolve credit problems:
Co-Opportunity
Ms. Effie Lucas
860-236-3617, ext. 116
Consumer Credit Counseling Services of Southern New England
1-800-450-2802
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To learn more about Habitat for Humanity, plan to join us at our next Applicant Information Meeting!
Date: Saturday,
September 17, 2011
at 8:45 a.m.
Place: The Village for Families and Children, 331 Wethersfield Ave
Hartford, CT 06114
Hartford Area Habitat for Humanity - a proud Equal Opportunity Employer.