Everyone has been at a point where they need some financial assistance when buying something, especially things that are too expensive to buy out of pocket, like a house or a car. Some people always just have a credit card at the ready in case of emergencies, or sometimes because it is easier to get a credit card than it is to get a loan.
You might also be considering applying for credit to improve your credit score, to earn rewards at a store, or because credit cards are basically universally accepted. Whatever the reason, the appeal to get any form of credit can be quite strong, so it is important to consider a few things before applying for it.
Please understand that this article can only cover so much due to the constraints of one blog post, so please take the time to research further into credit (and financial decisions in general). My favorite website to research my financial options is Crediful, the reason I like Crediful is because their main focus is helping others reach financial freedom in a very step by step basis in an easy to digest manner.
Your credit score/history
One thing that you need to consider before applying for any sort of credit is your current credit score or history. The first reason this is important is because whenever you apply for credit, the company will do an inquiry. Essentially this means that they will search your credit history to investigate a few factors, such as how often you pay, if you miss payments, if you pay in full and many more.
That inquiry will stay on your credit history, as well as the result of the inquiry; you were unsuccessful in getting the credit. Naturally, you would apply for credit somewhere else, that recent inquiry will be seen, and the chances of you getting the credit will decrease. Knowing your credit score and history before applying for credit will help to inform you if you should even apply at all, to whoever it is you are wanting credit from.
Secondly, a better credit score means getting approved for higher limits. In all honesty, getting a small amount of credit is not worth it when considering the total amount that will be paid back, and also since it won’t really do much good for your credit score since a small amount will be paid back in a short period of time.
Can you pay it back?
The most important question you should ask yourself is whether or not you will be able to pay it back. Are you thinking of getting credit because your current financial situation doesn’t allow you to pay for everything that needs to be paid? Are you currently unemployed and you need some extra cash? Then perhaps getting credit isn’t the best thing that you should do. It goes without saying that the extra money would definitely help, but only in the short-term, unfortunately in the long-term it would do more harm.
The credit will only last for a specific period of time, and then it must be paid back, and if you are unable to pay for everything that needs to be paid now, adding another expense isn’t going to help in the long run.
In addition to this, missing payments or not paying on time will result on quite stringent penalties, additional payments or even a summons to court. In other words, a loan that can’t be repaid, is a loan that should not be taken.
The interest rate
Before applying for a loan, you should carefully read through any information that relates to the interest rates. Many people have fallen for credit that advertises a very low interest rates, but often fail to check the repayment term. This means that they might be paying a small amount every month, but they will be paying for a longer period of time.
You don’t want to fall for that because it means you will end up paying much more in the long run than what the initial credit amount was. You should always compare the interest rate, loan amount and repayment rate to ensure that you don’t end up paying much more than what you initially want.
Another thing to check for are hidden charges, which are almost always present. For example, you might think that you could get a small loan, or a small amount of credit and then repay it much sooner than the agreed upon repayment period. Some agreements stipulate that you will need to pay a sizable amount of interest if paid early that totals to more than the initial credit amount.