Understanding Credit and Debt Management

Credit and debt are powerful financial tools that can help or hurt your financial future. Understanding how to use them wisely is crucial for financial success.

What is Credit?

Credit is your ability to borrow money or access goods/services with the understanding that you'll pay later. It's based on trust that you'll repay what you owe.

Types of Credit:

1. Revolving Credit: Credit cards, lines of credit

2. Installment Credit: Loans with fixed payments

3. Open Credit: Must be paid in full each month

Credit Scores Explained

Your credit score is a three-digit number (300-850) that represents your creditworthiness.

Credit Score Ranges:

• 800-850: Excellent

• 740-799: Very Good

• 670-739: Good

• 580-669: Fair

• 300-579: Poor

What Affects Your Credit Score:

1. Payment History (35%): On-time payments are crucial

2. Credit Utilization (30%): Keep balances low

3. Length of Credit History (15%): Longer history is better

4. Types of Credit (10%): Mix of credit types

5. New Credit (10%): Too many new accounts can hurt

Debt Management Strategies

1. Debt Snowball Method

• Pay minimums on all debts

• Put extra money toward smallest debt first

• Pros: Quick wins, psychological motivation

2. Debt Avalanche Method

• Pay minimums on all debts

• Put extra money toward highest interest rate debt

• Pros: Saves money on interest

Remember: Credit is a tool - use it wisely to build wealth, not fund a lifestyle you can't afford.