In today’s world, credit does indeed matter. In fact, 

obtaining and using different types of credit instruments 

is part of almost every American’s financial life. However, 

because it is so easy to make expensive mistakes that 

can follow you for a long time, it is a good idea to learn 

how to borrow wisely from the beginning. This program 

will cover the core concepts of credit usage, including:

• What is Credit?

• Getting Started

• Using Credit to Your Advantage

• Delete Your Debt

• Consumer Rights and Responsibilities

Chapter 1: What is Credit? 

In the broadest sense, credit means having the use of 

something before you pay for it. It adds flexibility to 

planning and makes it possible to pay for expensive items 

over a period of time. Credit comes in many different 

forms and it is important to understand how each works 

so you can obtain the right type for your needs. 

Secured Credit

This is commonly used to purchase a large item such as 

a home, car, or appliance. An asset (most often the item 

purchased) called collateral secures the loan. If you do 

not keep the monthly payment arrangement, the creditor 

has the right to reclaim the collateral. There are two types 

of secured credit:

• Secured/Closed-end. With a secured/closed-end 

credit instrument, you put down an initial deposit, and 

the item you purchase is taken as collateral for the 

loan. The remaining balance is calculated into equal 

installments that you repay over a specific period of 

time. An example would be a car or boat loan.

• Secured/Open-end. Secured/open-end credit is 

usually a type of revolving credit that is secured by 

collateral that you put down to secure the loan. It can 

be repaid in a single payment, equal payments, or 

unequal payments. A home equity line of credit is an 

example of secured, open-end credit.

Unsecured Credit 

This is credit extended without collateral (security). 

Because of the higher risk to lenders, unsecured credit 

generally carries a higher interest rate than secured credit. 

• Unsecured/Closed-End. Sometimes referred to as 

signature loans or personal loans, the repayment is 

made in equal, monthly installments. An example is a 

debt consolidation loan. 

• Unsecured/Open-End. The lender sets a credit limit 

and the borrower may use up to that amount. The 

initial agreement states the terms of repayment and 

the credit limit. Bills are issued monthly and the 

minimum payment due is based on the balance and 

terms. Credit cards are the most common form. 

Credit Cards

There are several types of credit cards on the market:

• General-purpose credit cards can be used virtually 

anywhere. 

 – If you have both an excellent credit history and 

a high income, you may be offered a “premium” 

card (sometimes called Gold or Platinum), which 

comes with a high credit limit and enhanced 

customer service. 

– Some credit cards offer points, rebates, or cashback rewards where the more you use them, the 

more benefits you receive. 

• Retail cards may only be used at a particular retail 

establishment, such as a department store or gas 

station. 

• Small business cards offer special perks to business 

owners and their employees. 

• Student cards generally offer lower credit limits and 

special benefits for students. 

Charge cards

A charge card is similar to a credit card, but you have to 

pay the entire balance in full each month. The credit limit 

is often very high or even unlimited. Charge cards usually 

come with higher annual fees than credit cards because 

no interest is charged. If you cannot make a full payment, 

a high rate of interest is assessed and late fees are 

charged. Collection action can be swift and severe.

Credit Matters

© 2013 BALANCE / REV0413 1
Debit Cards

It is important to not confuse debit cards and credit 

cards. Because the money is deducted from your 

checking account right away when you use a debit card, 

it is not a type of credit.

Chapter 2: Getting Started

What You Should Look For

Before you apply for credit, make sure you know what the 

terms of borrowing are, especially the following:

• Annual percentage rate (APR) – The APR is the 

annual rate of interest charged on the outstanding 

balance. The lower it is, the lower the cost of 

borrowing. The APR can either be fixed, meaning 

it never changes, or variable, meaning it fluctuates 

according to an index. For credit cards, a variable 

rate is common, as is charging a different rate for 

different types of transactions. (For example, the APR 

for cash advances is usually higher than the APR for 

purchases.) For mortgages and other large loans, a 

fixed rate is usually preferable because the payment 

is set. You may be able to get a lower rate initially 

with an adjustable-rate loan, but if the interest rate 

rises, the payment does too.

Keep in mind that the rate advertised in the application or 

marketing materials is the rate that is given to borrowers 

with the strongest credit history. After the creditor 

processes your application and checks your credit score, 

you may be given a higher rate. If you are not satisfied, 

you do not have to take the credit.

• Grace period – For credit cards, a grace period is 

the number of days, usually 21 to 30, before interest 

is assessed on new purchases. (It is only given if you 

paid off your balance in full the previous month. Also, 

there is usually no grace period for cash advances.) 

If your credit is good, you should have no problem 

finding a card with a grace period.

• Annual fee – Unless you want special features, if you 

have good credit, you should be able to find a credit 

card that does not charge an annual fee. If you have 

no or a poor credit history, you may be out of luck. 

However, once you build a positive credit history, 

request that the fee be reduced or eliminated, or shop 

for a card that doesn’t charge one.

• Late fee – Virtually every credit issuer charges a late 

fee. You should always make your payments on time, 

but it does not hurt to look for an account with a low 

late fee just in case.

• Application or activation fee – For secured loans, 

you may have to pay an application fee (which should 

be refunded if you are denied). However, if you have 

good credit, you should not have to pay one when 

applying for a credit card. Neither should you have to 

pay a fee to activate the card.

• Miscellaneous fees – Some credit card issuers 

charge for a variety of other activities, such as for 

not carrying a balance or carrying a balance under a 

certain sum. The better your credit history is, the less 

you have to accept such expensive terms.

What Creditors Look For

To get a credit card or other type of credit, you must fill 

out and submit an application. You may receive a “preapproved” offer in the mail, but it is just a marketing 

device – you still have to apply.

While specific approval guidelines vary from lender to 

lender, many base them on the “Five C’s of credit”:

• Character – Character refers to how responsible you 

are with repaying your debts. Most creditors judge 

this by looking at your credit report and/or score. Your 

credit report tracks your credit activity: what accounts 

you have, how much you owe, your payment history, 

etc. Your credit score is a numeric summary of the 

information in your credit report and is formulated 

to predict the likelihood you will not repay what you 

borrowed. The two most important factors in your 

credit score are your payment history and level of 

debt (the higher the balance, the lower your score, 

especially if the balance is close to your credit limit).

• Capacity – Capacity refers to the ability to repay 

what you borrow. Few lenders would approve you 

for a loan with a $1,700 monthly payment when you 

are bringing in $1,800 a month. Creditors also usually 

consider what your current debt obligations are. If 

a creditor feels you do not have the capacity to pay 

back the amount you want to borrow, they may deny 

you or approve you for a lesser amount.

• Capital – Capital refers to the assets that you have. 

Basically, the creditor wants to know if you have 

savings or other assets that you can use to make 

your payments if you lose your job or experience 

something else unexpected.

• Collateral – When you are applying for secured credit 

and the collateral is an item, not cash, the lender 

will likely be concerned with what the condition of 

the collateral is. For example, most lenders require 

an appraisal when you apply for a mortgage. A 

crumbling house near a toxic dump that appraises 

for $25,000 is not very good collateral for a $200,000 

loan.

© 2013 BALANCE / REV0413 2
• Conditions – Conditions are situations that could 

affect your ability to make payments. Often these 

situations are beyond your control. For example, a 

creditor may be less likely to lend to people if the 

economy is weak and many companies are shutting 

down.

New to Credit

If you are new to credit (or trying to reestablish a positive 

credit history), you may find it difficult to get approved 

for a regular credit card or loan. However, you still have 

options. A secured credit card is usually the easiest type 

of credit to get. As mentioned previously, it requires you 

to make a cash deposit that the creditor can keep if you 

do not make your payments. (You will get the deposit 

back otherwise.) The credit limit is often low, and the fees 

can be high, but you may be able to convert it to a regular 

credit card after a year or two of on-time payments. Make 

sure that the creditor reports your account to the credit 

bureaus – if they don’t, you won’t be establishing a credit 

history. The approval standards are often not that strict 

on retail cards either. Another option is to have someone 

with a good credit score cosign an account for you. This 

requires a great deal of trust on the part of the cosigner – 

if you fail to pay, he or she can be held responsible for the 

full balance. 

Chapter 3: Use Credit to Your Advantage

Credit use is not without its pitfalls. Interest rates and fees 

can dramatically increase the cost of a purchase made 

on credit, and generous credit lines make overspending 

easy. However, when used correctly, credit can be an 

excellent tool, and it’s the only way to build a positive 

credit history – which will help you get what you want in 

the future at the lowest cost.

Wise Use – and Misuse

There are many appropriate uses for credit cards. 

Because of the protections provided and fact that 

the money is not immediately deducted from your 

checking account, it is a good payment option for online purchases, airline tickets, car rentals, hotel rooms, 

and other products and services that require advance 

payment. Furthermore, it makes it easier to track your 

spending since you receive detailed account statements. 

With some cards, you can even accumulate points for 

such goodies as airline tickets, cash back rewards, and 

discounted merchandise. Best of all, if your card has a 

grace period and you pay off your balance in full each 

month, you get all of these benefits without having to pay 

any interest.

Many people get into trouble when they see their credit 

line as “extra cash.” It is not a bonus for vacations or 

money for emergencies (that is what savings is for). Most 

importantly, it is not additional income to get you through 

a shortfall until the next month. Using it that way may 

help temporarily, but it will make the next month more 

stressful when the same cash flow problems arise – but 

with more debt to pay.

It is best to use close-ended credit for something that 

will provide a long-term benefit. For example, taking out 

a mortgage to buy a home provides your family with a 

place to live and can also be an investment because most 

homes increase in value over time. However, even if it will 

provide a benefit, it is important to make sure that you 

can comfortably afford the monthly payment before you 

borrow. Don’t just rely on the lender’s approval amount – 

take a look at your budget to see how much money you 

have available to make payments. Remember, once you 

sign the loan papers, you are legally obligated to pay the 

loan back under the set terms.

Tips

• Only charge the amount you can afford to repay when 

the bill comes due.

• Know your due dates, and always pay on time. Late 

payments can be reflected on your credit report and 

lower your score.

• If you have debt now, repay it as quickly as possible.

• Avoid expensive, high-penalty loans that that can 

work against you.

• Keep your charge receipts in an envelope with a 

running total on the outside. If the total exceeds 

an amount you consider appropriate, curtail your 

spending.

• Avoid shopping in stores where you know you will be 

tempted to spend more than you can afford to repay.

• Save monthly for such periodic and emergency 

expenses as vehicle maintenance, medical bills, 

holiday gifts, and vacations. That way, you won’t 

need to use credit to cover these expenses, or, if you 

do charge them, you can pay the balance in full when 

the bill arrives.

• Limit the number of open credit card accounts you 

have. It’s much easier to keep track of your total 

outstanding debt with just a couple of accounts.

• If you are having a hard time using credit 

responsibility, it may be best to not have any active 

accounts until you can make changes, even if it hurts 

your credit score.

© 2013 BALANCE / REV0413 3
Credit To Avoid

Not all credit is created equal. There are some loans on 

the market today that are especially costly for consumers 

and should be avoided:

• Payday loans – This is a way to borrow from your 

future income. You write a check to the lender for the 

amount you wish to borrow plus a fee. The check 

is typically held until your next payday, at which 

time you can either redeem the check by paying the 

face amount or allow the check to be cashed. If you 

can’t afford to cover the check, you may roll it over 

for another term by writing another check, which 

will result in another set of fees being added to the 

balance. With an average annual interest rate of more 

than 400 percent, payday loans are no bargain.

• Car title loans – Car title loans are promoted as 

small emergency loans but because the interest rate 

is often in the triple digits, repayment can be difficult 

and expensive. You don’t need good credit or often 

even a job to receive a car title loan – just sign over 

your title as collateral and hand in an extra set of 

keys. The typical repayment period is one month. 

Though most loans are for $1000 or less, the finance 

charges quickly rack up, and it is possible to lose 

your vehicle if you can’t meet the payments.

• Pawn shop loans – You take a consumer good, 

such as an electronic device or jewelry, to the pawn 

shop and are given a short-term loan in exchange for 

leaving the item there as collateral. If you pay back 

the loan, including interest, on time, you get the item 

back. However, if you fail to repay or renew the loan, 

your item can be sold. The APR for pawn shop loans 

are typically around 120-300 percent, much higher 

than the rate charged on credit cards. Many pawn 

shops also charge additional fees for insurance and 

storage.

Chapter 4: Delete Your Debt

If you currently owe money on credit cards and/or 

personal loans, it is a good idea to develop a plan to 

repay them as quickly as possible. Finance charges make 

holding onto balances extremely expensive. There are 

several methods you may be able to use to delete your 

debt efficiently.

Pay Extra

Are you just making the minimum required payments 

now? Minimum payments are often set very low, and you 

may be able shave years off your debt repayment time 

just by paying extra. If you have multiple accounts, it is 

better to be systematic and focus your extra payments 

on one creditor at a time instead of sending a little extra 

to all of your creditors. (Of course, you should continue to 

make minimum payments to everyone.) Many people like 

to start with the debt with the lowest balance because 

it will be paid off the soonest, providing gratification 

that makes it easier to keep going. However, you will 

save the most money by starting with the debt with the 

highest interest rate. Once the first debt is paid off, put 

that money toward the debt with next lowest balance 

or highest interest rate and so and so on until all of the 

debts are paid off.

If you feel that you currently don’t have any spare cash 

lying around, take a close look at your budget. Are there 

any expenses that can be cut or reduced, like dining out 

or cable? Do you receive periodic sources of income, 

such as a tax refund or bonus, that you can direct toward 

your debt even if you can’t afford to pay extra on a 

regular basis?

Balance Transfer

As the name implies, a balance transfer is the transfer of 

the balance from one credit card (or another type of debt) 

to another. This could be a good option if you are able 

to get a card with a lower APR than what you have now. 

The lower your interest rate, the more of your payment 

that goes toward principal and the sooner you will be 

debt free. However, before you do a balance transfer, be 

aware that most creditors charge a balance transfer fee. If 

the interest rate on the new card is only slightly lower, the 

savings may be negligible.

It is better for your credit score to keep old accounts 

open when you do a balance transfer. However, make 

sure to use them responsibly. If you charge them up and 

cannot pay off the balances in full each month, you could 

wind up with more debt than before.

Home Equity

If you are a homeowner and have equity in your home 

(owe less on your mortgage(s) than the home’s value), 

you may be able to use some of that equity to pay off 

your unsecured debt. Not only is the interest rate on a 

mortgage usually lower than for unsecured debt, but, in 

most cases, the interest paid is tax-deductible as well. 

Besides selling, there are two basic ways you can take 

the equity out of your house:

• Cash-out refinance – With a cash-out refinance, 

you take out a new mortgage for an amount greater 

than the balance on your existing mortgage and get 

back the difference in cash. For example, you owe 

$240,000 on your mortgage and refinance with a 

$260,000 mortgage – you receive $20,000, which you 

could use to pay off your debt. Keep in mind that you 

typically need to have good credit to refinance, and 

there is a limit as to how much equity you can take 

out. (Doing a traditional refinance is another option. 

You won’t receive any cash to pay off debts, but if 

you can lower your mortgage payment, you will have 

© 2013 BALANCE / REV0413 4
more money to send to your other creditors each 

month.)

• Second mortgage – A second mortgage is a loan or 

line of credit that is taken out against your home in 

addition to the first (or primary) mortgage. If you take 

out a home equity loan, you receive a lump sum at 

closing. If you opt for the home equity line of credit, 

you can withdraw from it repeatedly over a set period 

of time. Like with refinancing, you usually need to 

have good credit to be approved, and there is a limit 

as to how much you can borrow.

Think carefully before you decide to refinance or take out 

a second mortgage to pay off debt. Both options come 

with fees that can cancel out your potential savings. 

Furthermore, if you are spending more than you make, 

tapping out the equity in your home to pay off consumer 

debt is a short-term solution that can put your home in 

jeopardy of foreclosure. Many people get into trouble by 

using their home equity to pay off unsecured debts, then 

running up the credit cards again. That pattern leads to 

a very difficult situation: no home equity, high debt, and 

the inability to make payments on both secured and 

unsecured financial commitments.

Debt Consolidation Loan

Another possibility you may have is consolidating some or 

all of your debt into a new loan. Many financial institutions 

offer unsecured loans specifically for debt consolidation. 

The advantage is that you have one convenient payment, 

and if your credit standing is good, you may be able to 

get an interest rate that is less than what you currently 

have. However, if it isn’t, be prepared to pay more.

Like with a balance transfer, cash-out refinance, or 

second mortgage, if your expenses exceed your 

income and you need credit to close the gap, a debt 

consolidation loan is just a short-term solution that may 

not benefit you in the long run.

Debt Management Plan (DMP)

DMPs are administered by credit counseling agencies. 

You make one payment to them, and they distribute 

the money to your creditors. For people with multiple 

accounts, being able to make one payment can be 

a relief. Furthermore, many creditors reduce or even 

eliminate interest rates and fees for borrowers on a DMP, 

so less money goes toward finance charges and more 

goes toward the principal. Because you are required 

to suspend further use of your credit lines when on the 

plan, there is not the risk of getting further into debt like 

there is when taking out a loan. In order to participate in 

a DMP, you must first complete an hour-long session with 

a counselor, who will examine your financial situation and 

see if it is an affordable and beneficial option.

Chapter 5: Consumer Rights and Responsibilities

When you use credit, you enter into a contract – the 

financial institution lends you money with specific terms, 

and you agree to repay it under those terms. Therefore, 

as a borrower, you have both rights and responsibilities. 

Federal Law

The Consumer Financial Protection Bureau (CFPB) 

enforces these rules. Any violation should be reported to 

the CFPB at www.consumerfinance.gov/complaint or by 

calling 855-411-2372. 

Truth in Lending Act (TILA)

The TILA requires credit issuers to disclose the following:

• The finance costs in dollars, annual interest rate, and 

any late or penalty fees that may be imposed.

• Written itemization of the amount borrowed and 

the total amount of the loan, including interest and 

fees, and the number, amount, and due dates of all 

payments necessary to repay the loan.

Fair Credit Billing Act (FCBA)

The FCBA offers the following protections under the law:

• Liability for lost or stolen credit cards is limited to $50 

if you notify the card issuer within 30 days.

• If you purchase a defective item or substandard 

service by credit card, the payment can be withheld 

if the seller refuses to replace, repair or otherwise 

correct the problem.

• If there has been an error in a credit card bill the 

lender must correct it, or explain why the amount is 

believed correct, within 90 days after being notified.

Fair Debt Collections Practices Act

The FDCPA regulates collection agencies’ conduct, and 

specifically prohibits such action as:

• Calling before 8am or after 9pm, or at any 

inconvenient time. 

• Calling you at work if you have informed the 

collector that the calls are jeopardizing your job. 

• Discussing your debt with a third party other than 

your spouse without your permission, except to leave 

a message that he is trying to contact you.

• Using profanity.

• Misrepresenting himself. For example, he cannot say 

he is an attorney if he is not.

© 2013 BALANCE / REV0413 5
• Collectors cannot make false threats. If a collector 

says he is going to take a specific action against you 

to enforce the debt, he has to do it. 

Credit Card Accountability Responsibility and 

Disclosure (Credit CARD) Act

The Credit CARD Act was designed to protect credit 

cardholders and give them certain rights, including:

• Your interest rate cannot be increased during the first 

12 months of opening a credit card unless you are 

more than 60 days late with a payment.

• An interest rate increase can only apply to new 

charges, not the pre-existing balance. (This rule does 

not apply if you are past due more than 60 days.)

• If your interest rate was raised due to making a 

payment late, the card issuer must reinstate the lower 

interest rate if you make on-time payments for six 

months.

• You cannot be charged an over-the-limit fee unless 

you authorize your credit card company to process 

over-the-limit transactions.

• If your due date falls on a weekend or holiday, your 

payment is considered on time if it is made on the 

next business day.

Debt and lawsuits

A creditor or collector cannot take any wages, money, 

or property without first suing you in court, winning, 

and then obtaining a judgment. Also, be aware that in 

most instances you cannot go to jail for non-payment of 

unsecured debt, even if you have lost a lawsuit.

State Law

You may also have additional rights under state law. 

Check with your state’s Office of the Attorney General 

for more information. To locate your Attorney General, 

contact the National Association of Attorneys General at 

www.naag.org.

© 2013 BALANCE / REV0413 6