The choice of credit

Understanding credit before committing

Being able to buy on credit or borrow money can be useful, but understanding how credit works and the choice of credit type is essential. Before using credit, it is important to find out and avoid any surprises because choosing the wrong credit can remain a significant risk for the debtor. Thus, it is very important to know the type of credit given its versatility. Indeed, there are several credit products, the most well-known is certainly the credit card; but there is also the student loan, the car loan, the personal loan, the line of credit and the mortgage loan.

The importance of the credit file

When you start using a credit product, the credit bureaus which are the creditors create a credit file and evaluate how it is used. These credit bureaus are private companies that sell the data contained in your credit file to their members, that is to say banks, credit companies and other financial institutions. Having a perfect history in your credit file allows you to continue to have access to credit over several instalments. This being the case, it is necessary to avoid late payments and other negative data that will remain in the file for several years. However, this duration varies from one credit bureau to another. Furthermore, it is recommended to use your loan responsibly to facilitate future borrowings.

Assessing your needs and choosing your credit

Knowing this basic information, you need to assess your needs, have a well-established plan and be ready to use your credit well and repay it on time. To choose your credit, several channels are available, namely internet research through interest rate comparators, word of mouth, advertisements, etc. Choosing the best rate is very advantageous but knowing the charges is even better. In clear terms, you must look for the real cost of credit or the annual percentage rate (APR) which takes into account all credit fees such as the nominal rate, insurance, guarantee fees, application fees… hence the need to have your APR checked before borrowing.

Credit management and associated risks

The amount borrowed must be in line with the type of investment or expense. Therefore, good management is required for regular payments at the risk of enduring difficulties. These are not limited only to the bank but can go as far as harming the social and professional reputation of the debtor. Thus, it is recommended to obtain information on the aforementioned terms. The choice is not limited only to these but also to the debtor's repayment capacity (never take out a loan whose monthly payment is $100 if you can only afford $70 instead, in this case, it is better to take instead another loan with a monthly repayment of $60). Adding to this the unforeseen events that will push the debtor to an early exit, it is also imperative to know the exit cost to avoid possible penalties.

Guarantees and creditor flexibility

On the other hand, the guarantee conditions constitute a key element to protect oneself from consequences that could materialise through the sale of your precious goods in order to repay your instalment. Knowing that a financial situation is very changeable, the creditor's flexibility must be carefully studied to deal with exceptionally unfavourable situations allowing you to request a derogation, a payment deferral in this case. Above all, you must avoid any situation that could lead you to over-indebtedness to the point of tainting your history of regular payment in your credit file.

Conclusion: plan and compare before committing

In any case, credit allows you to finance projects and satisfy needs of various kinds. However, you must always remain cautious and focus on the type of credit adapted to your needs which must be correlated with your capacity situation. Poor loan management reflects the debtor's inability to make projections on different financial scenarios. Therefore, you must plan your financing and study the creditor organisations, make a comparison of the annual percentage rates before committing. Thus, the various situations are already envisaged and the consequences manageable, for a better credit file history and credibility with professionals.