 |
Credit and Its Cost
What is Credit?
Credit is money granted by a lender (or creditor) to a debtor (or
borrower) whereby the lender defers receiving payment of the debt
for a period. In exchange for the credit allowed, the lender will
get back the money lent plus interest. The borrower has use of
the money immediately, rather than waiting until the money
required is saved up.
It enables the borrower to pay for things immediately, even if
they cannot afford to pay for it themselves. Interest is the
compensation required by the lender for the use of his/her money.
There is a time value to money because of inflation, by way of an
interest charge.
What is the Cost of Credit?
The cost, or charge, for using credit debt is called interest.
This interest can either be simple interest or compound
interest.
- Simple interest
This is interest charged only on the principal amount borrowed.
Simple interest does not add interest that's due, back on to
the principal amount because it is usually paid out.
- Compound interest
This is interest charged, not only on the principal amount
owing, but also on the interest that has been accrued on that
principal amount. The interest is added on to the principal and
then the new interest is calculated on the new total of those
two items.
What happens is that there is a compounding effect, so that
interest is charged on the interest. The result is that the
lender receives a higher and higher return because the interest
charge is levied, not only on the amount originally lent, but
also on all interest due on the amounts over the term of the
loan.
APR - Interest Rate
The APR is the reference to the interest rate the lender charges
the borrower for the use of the money. You need to know a little
about APR because it shows what the cost of the credit actually
is. The cost of credit is more than just knowing the interest
rate; it is important to be familiar with the annual percentage
rate.
The APR is the cost of credit measured on a yearly basis and
expresses a yearly rate. By comparing the APR of loans or credit
cards etc you can work out which card is likely to cost you the
most. You need to find out what the correct annual percentage
rate being charged to you is so you can make decisions on your
lending situation because it will affect the selection of credit
cards or other loans you are looking at taking on.
Using the APR to your Advantage
If you carry a balance from month to month on your credit card
and the card has a high APR, the only way to reduce the interest
is to pay more each month. If you only pay the minimum amount,
not only will it take you a long time to reduce your debt, but
you will also pay more interest.
All the time you carry a balance on the card, the interest
adds up. A credit card balance can actually increase considerably
when you only make the minimum payments. This is because the
balance on your card is left to accrue interest over time and so
it just keeps growing. Check out what the APR is because the
lower your APR, the lower the fees charged to you.
What's the Difference Between a Fixed and Variable
Rate?
- Fixed - A fixed interest rate means that the rate of
finance charged does not change throughout the term of the
loan. For example, you may take out a loan at 5% fixed for
three years. This means that the interest rate will not change
over that three-year period and will remain at that 5%.
- Variable - A variable rate, however, is determined
by an index such as the prime rate charged by banks. The
variable rate allows the bank to charge an interest that more
correctly reflects the current market conditions.
When shopping for a loan, make sure you understand clearly the
difference between a fixed and a variable rate.
Copyright 2005 StartRunGrow
http://www.startrungrow.com
StartRunGrow (http://www.startrungrow.com) is
a global online information organization that specializes in
creating, developing and marketing business help information
specifically with the aim of "making business easier" for
entrepreneurs around the world. The StartRunGrow objective is to
become a dominant player in the business help arena providing end
to end solutions for the millions of small and medium businesses
worldwide who continue to struggle daily with the difficulties of
starting, running and growing a successful business.
MORE RESOURCES:
Credit - Google News
|
|
|
RELATED ARTICLES
Free Credit Reports: From
The 3 Major Credit Bureaus!
Get your credit report online for FREE. Many financial
advisors suggest that you periodically review your credit
report for inaccuracies or omissions.
Credit Card
Shocker
Have you ever looked at your credit card statement? I'm not
talking about just making sure that all the transactions
are correct. I'm talking about looking at the finance
charges.
Always Avoid Payment
Holidays
Once you've been paying off a credit card for a while, you
might be offered a 'payment holiday'. You'll get a letter,
saying that since the company knows it's difficult for some
families around Christmas (or whatever other excuse they
think up), they're offering you a month off from paying, as
a 'special present'.
How To Eliminate Credit
Card Debt
There is almost nothing more troublesome than having too
much debt to pay each month. Consumers incur debt for many
different reasons.
The Credit Card Surprise
That You Need to Look Out For
Companies that issue credit cards want to make a profit. No
one disagrees with that.
5 Ways To Prevent Credit
Card Late Fees
Paying a credit card late fee is the same as throwing your
money away. Late credit card payments can also hurt your
credit score.
How Credit Scoring
Works
The all important credit score! It determines the amount of
loan you can get, it determines the interest rate at which
you are charged for a loan, etc. Your credit score plays an
important figure in your financial life.
Opting For A Credit
Card? Check Out Certain Terms
You've just received a "pre-approved" credit card offer in
your mail. Without wasting a minute you're ready to accept
it, especially if it's the "before-the-offer-expires" one.
Identity Theft - Dont
Think You Are Immune
As identity theft becomes more prevalent, the need to
regularly check your credit report is very easy to see and
understand. Two big headlines in the news recently point to
how closely tied your credit report and identity theft are.
Credit Counseling
Basics
Credit counseling is an option you might want to consider
if you are having financial problems. The stress can be
overwhelming when you have creditors calling you daily to
collect money that you simply don't have.
All Is Fair In Love,
War, and, Your Credit Report - At Least It Should Be!
Understanding the FCRA
Fact: Over 150 million Americans have credit report with
the three major credit reporting agencies. Approximately 50
million of these credit reports contain errors, many of
which are inaccurate.
Bankruptcy vs. Credit
Counseling: What Should I Do?
Credit Counseling and bankruptcy are both ways to relieve
the stress of debt. However, they are very different and it
is important to understand both before making a decision as
to which is best for you.
Shoppers Beware - Tis
The Season
It's the number one complaint from consumers and it only
takes a moment for you to become a victim. While you search
for holiday bargains, identity thieves are searching for
targets - unsuspecting consumers.
Rate Tarts Losing
Ability to Cherry Pick
A "rate tart" is someone who switches from one zero per
cent introductory credit card deal to another to avoid
paying interest; however they may be set to become
something of the past. Recently a number of the major
credit card companies, including Egg, Barclays, the Royal
Bank of Scotland and MBNA have introduced transfer charges
for people who want to shift their outstanding credit card
balances to a new card to take advantage of a zero per cent
introductory rate.
Borrowing on a Credit
Card
One of the easiest ways to borrow money of a financial
institute is to use a Credit Card, available from all
banks, building societies, and other financial
organisations. The choices available are enormous, with a
wide variety of interest charges, annual charges, loyalty
schemes, and bonus points available.
Learn How to Improve Your
Credit Score
Having a damaging credit record can hurt you in many ways.
It may prohibit you from making an important purchase such
as a home, car, computer or vacation.
Credit Cards - The Top 3
Things You Need To Know
Today there are so many different credit cards available,
student prepaid, low interest cards etc. that it has
becomes a real hassle to find the right one that will suit
your needs.
Balance Transfers
Introduction
Credit card balance transfer involves using a credit card
to pay off the amount outstanding on one or more
credit/store cards. The total debt then moves to one card.
Maximizing Credit Card
Rewards
We spend money every single day on many different types of
products and services and the banks' newest offer is that
of saving when spending if you use their services; that is
if you pay for your expenditures with special credit cards.
These credit cards are part of a wide offer and the best
thing to do is read as many bank-offers as possible before
choosing a particular card.
Everything You Always
Wanted To Know About Your Credit Report
Your credit report is a very powerful report that essential
controls what you can and cannot do in your life.
Unfortunately many people aren't aware of what a credit
report actually is and what information is contained on the
report.
|
|
