How to Apply for and Use Credit Wisely

Applying for credit

Any time you want new credit, you will go through an application process.

1. You will fill out a form where they ask for basic info, such as your name, address, email, and phone.
2. They will also want to know your income, so they can confirm you can repay the credit you will get.
3. Finally, you will provide your Social Security number. They will use this to run a “credit check” where they check your credit report and credit score to make sure you qualify for the credit you want.
4. Once they confirm you qualify, they’ll tell you the interest rate and terms on the credit they’re willing to offer. Terms refers to the amount of credit and other features that come with the credit you will get.
5. If you agree to the rate and terms they offer, you will be approved.

Applying for loans vs applying for credit cards

Loan applications tend to be tougher than credit card applications. With credit cards, you can apply online and can get approved almost instantly.

With loan applications, you go through a process called “underwriting” where the lender takes extra precautions to make sure you can afford the payments.

For example, they will check your “debt-to-income” ratio, which measures your total monthly debt payments versus your total monthly income. If your ratio is too high, you won’t qualify for the loan.

You may also have to provide extra paperwork on loan applications, like pay stubs and tax returns that verify the income you say you make.

So, when you apply for a loan, be prepared to jump through a few hoops before you qualify.

Using credit

How you use credit varies based on what type of credit it is.

Revolving credit (secured and unsecured)

All revolving credit works in basically the same way, whether it is secured or unsecured.

1. You have an open credit line up to a certain amount (also known as your credit limit).
2. You borrow money as needed. For example, you make charges with your credit card.
3. This increases the balance on your account.
4. Each month, you must make a minimum required payment. This is usually a small percentage of the balance you owe.

With revolving credit like credit cards, you can have the credit line open as long as you want.

Some revolving credit has a time limit. That means you can only use the credit line for a set time, then you have to pay off the balance and the account closes.

Smart Money Tip: Always pay more than minimum

Even though revolving credit only requires you to make a small payment, you always want to pay more if you can. Paying off the credit you use as quickly as possible will minimize your debt.

That’s important because debt can easily take over your budget if you’re not careful! So, be smart and pay as much as you can whenever you can.

Unsecured installment credit

Unsecured installment credit, such as personal loans, work slightly different from secured installment credit, like auto loans.

Here is how it works:

1. You apply to receive a set amount of money. The lender will usually ask you what the money is for.
2. Once you are approved for the loan, the lender will deposit the money into a bank account that you choose.
3. The loan payments typically start the month after you receive your funds.
4. You pay the lender the same amount every month.
5. Part of the payment goes to over monthly interest charges and the rest pays down the balance owed.
6. You make payments until the end of the loan term and the loan is paid off fully.

Secured installment credit

The repayment of secured installment credit, like an auto loan, works the same way that repayment of unsecured installment credit works. So, steps 3-6 above also apply here.

But applying for the loan and what happens after you get approved is slightly different.

• For secured loans, the amount you borrow is equal to the purchase price of the property you want to buy minus the down payment you make.
  • A down payment is money you pay upfront for a big purchase that you want to finance with the loan.
  • The more money you put down, the less you need to borrow
• Once you are approved for the loan, you don’t get the funds. Instead, you get the property you purchase with the loan.
  • For example, once you sign the paperwork for your auto loan, they hand you the keys and you get to drive your car off the lot!