02 Nov 30-Day versus Open Credit
Our entire society is run on credit. As time is the ultimate resource, we borrow the future in order to seize the present. This can be good and bad. It can even turn catastrophic if governments stretch the concept of credit to the breaking point until the collapse of the system is mathematically unavoidable. Predictably, most governments have already done so, and we are already living on a borrowed time. Just the notion of negative interest rates popping up all over the major governmental economic institutions as a legitimate economic construct should tell you everything about how colossally incompetent governments are, and the depth of economic woes that lie ahead of us thanks to the irresponsible government actions.
However, for an individual, it’s a different story. One has to carefully gauge what credit to apply for, based on the specific requirements, conditions of payment, and the timely ability to pay the credit as was stipulated in the contract.
There are several types of credits, offered by the various financial institutions.
What is Open Credit?
Open credit, also known as open-end credit, revolving credit or a line of credit, is a type of loan that’s pre-approved and can be used many times up to a limit that was previously agreed upon. Accordingly, open credit can be paid before any payment is even due.
The main advantage of the open or revolving credit is that you have the highest level of control over how much you borrow and when. Moreover, interest rates are not in effect on the part of the loan that’s not being used. Therefore, compared to a regular credit based on fixed installment rates that you have to pay in equal monthly installments until the loan is paid off, open credit, if responsibly managed, could save you a lot of money.
Credit can be issued either as a direct loan, which is a closed credit, or as a credit card, which is an open credit. Closed credits are specific loans that are fixed to a specific amount and a specific time frame of monthly installments.
Open credits are also called revolving credits precisely because you do not have to apply every time for a new one. Instead, you are issued a credit card, and the more you will borrow, the more interest rate you will be required to pay. Furthermore, the main reason for open credit’s huge popularity is that the balance can be carried into the next month, as long as the minimum required payment has been fulfilled.
Obviously, due to the convenience and omnipresence of electronic payments, either online or in the stores, most credits are issued in the form of credit cards. Therefore, most credits issued are open credits.They give you a great amount of flexibility, and an immediate access to your funds, after a payment has been fulfilled within an allotted timeframe.
Assuring the Bank
Naturally, banks have to have some insurance that their lentmoney will be paid in full. After all, banks are taking the risk in this transaction. To alleviate that risk they issue what’s called a “home equity” open credit, the most common consumer market form for this line of credit. As the term implies, if you fail to pay your credit in time, home equity means that the bank has the right to seize the property in your home, equal to the amount of borrowed money that you have failed to pay.
If the open credit is being issued for a business, different parameters will be used to ascertain the maximum limits, which will depend on the business’ assets and revenue. In addition, the open credit for businesses can be bolstered with various collaterals – real estate or other company’s property, the value of which can be determined accurately, without the significant depreciation factor being present.
In essence, there are only 2 considerations that you have to keep in mind when looking at your credit options:
1. The credit amount you need
2. How is that credit amount paid
The best credit option will be the one that considers those two factors.
The open credits with a 30-day limit are not so common but are prudent to use if you feel that your credit expenditure can spin out of culture. Although the balance transfer into the next month is an advantage, it also means that you will pay more for interest rates, and before you know it, you’ve just spent a lot of money on merely paying the bank their compounded interest rate.This cannot happen with a 30-day limit card, which means that you have to pay every single cent at the end of each month.
Most common credit cards – Visa, MasterCard, Diners Club, are almost always revolving credit lines, while American Express is almost always a 30-day credit line.
In the end, the decision between the standard open credit and the 30-day open credit depends on how well you know yourself. Do you possess enough self-discipline and diligence to check your bank account on a regular basis? Do you have enough self-discipline to abstain from unnecessary purchases?
If that’s the case, then the standard open credit offered by Visa, MasterCard, or Diners Club would be the best fit for you, as you can always find yourself in a situation where you would need a balance transfer into the next month without fully paying the borrowed money. But that would be a calculated consideration on your part.
On the other hand, if you think that you will likely spin out of control, a 30-day credit will be a strong incentive to always pay your debt, while at the same time, not putting yourself in serious financial trouble.
There’s an exception though. If you have a specific purchase in mind which you know you could not repay in one month, than the 30-day open credit would obviously be a poor option to choose.
Secured vs. Unsecured Cards
Another matter to consider when applying for a credit card, if that would be your first credit card, is that the banks would possess no relevant information about your credit history. Therefore, you will be issued a secured card instead of an unsecured one.
If that’s the case, you will have to put a deposit first. Unsecured cards have no such requirement because of the solid credit score with the bank. Higher credit score = higher bank trust.
For both options – revolving or 30-day limit cards – there are secured or unsecured credit cards.
Knowing your Credit Score
Your credit score is vital for your future dealings with any bank as they all share the same data about your financial history and status. Your credit score simply represents your trustworthiness – how likely is it that you will pay your bills on time.
Your credit report is compiled by 3 large credit organizations: TransUnion, Experian, and Equifax. They extract all the information from the public records, and all companies and banks you have ever done business with.
When this data is compiled, they create your financial history report that has 4 sections:
1. Personal info: Standard data about your identity: name, last name, address, along with all the previous addresses, date of birth, and Social Security Number(SSN).
2. Credit history: All of your closed and open credit accounts, past and present, but most importantly, your track record of paying your bills. This includes your medical bills as well.
3. Credit inquiries: Listing of everyone who asked for your credit history in the last two years: employers, lenders, landlords, business associates, etc.
4. Public records: Listing of public records of your finances: bankruptcies, loans…but not non-financial records in the vein of speeding tickets. That kind of information remains confidential.
Obviously, the most important section you need to review is the second one. Sometimes, mistakes can be made when your credit history is compiled. For example, if your doctor’s administrator had mistakenly reported that you didn’t pay your deductible. The correction of these kinds of errors requires quite an amount of effort on your part. You would first have to reach your creditor, then your creditor’s agencies. As the final resort, you can always reach out to the Consumer Financial Protection Bureau, if you find other avenues of correcting mistakes on your credit report as unresponsive.
Additionally, it’s always possible that someone may have defrauded you by using your identity to get credit or mortgage. If you notice such irregularities, call your credit organization immediately so they can put a fraud alert on the account in question. They will then take the necessary verification procedures regarding the suspected activity. Of course, you would additionally want to file an official police report as well, and the report to Federal Trade Commission – FTC. When it comes to matters of your credit credibility, it’s always prudent to utilize all the options that are at your disposal.
History of the Credit Score
The first company to devise the credit score formula, which then became the standard for all the banks, was the Fair Isaac Corporation (FICO) from Minneapolis. The formula they have constructed boils down all of your credit history into a three-digit score that can range from 300 to 850.
The formula used to devise that score is distributed among all the major credit bureaus – TransUnion, Experian, and Equifax – although given the disastrous hack that recently happened at Equifax, that particular credit bureau may no longer function as you are reading this. Keep in mind that no credit bureau reaches the same credit score based on the FICO formula, as each one extracts your financial information from a different set of lender networks. Naturally, FICO earns a small royalty from their credit score formula.
Consequently, you will have to deal with three FICO scores, but usually, they will not vary significantly. You can apply to get those 3 reports for free, annually. If you want more frequent reports, the usual fee is about $15. Unfortunately, the Experian bureau has stopped selling their reports to individuals; they now only sell to businesses.
Understanding your Credit Score Calculation
As stated previously, the purpose of your credit score is to reflect the level of your dependability – your track record in fulfilling your financial obligations in a timely manner.
If you fail to pay on time, you receive a black mark, which is present in your financial record for no less than 7 years, so you should always be as diligent as possible with payments if you intend to have future, mutually beneficial dealing with banks.
Despite what you might have heard, many factors do not go into the calculation: income level, debit card transactions, employment status, savings, overdraft fees, bounced checks, belated rent (only if it was resolved without any institutional involvement like small claims court), utility bills.
The factors that do enter into your credit score calculation can be divided into four sections;the percentages show how much they can each affect your FICO credit score:
Payment History – 35%
The frequency of your late payments, by how long were they late, and the last time you paid late.
The best way to prevent this from happening is by setting up auto-payments. A late payment will significantly lower your FICO score, which will, in turn, affect your interest rates.
Overall Debt – 30%
Obviously, the more debt you have the greater liability you will become from the bank’s perspective.
However, the impact of this can depend on the ratio of your debt to the amount you could still borrow. Therefore, to keep that ratio as low as possible, you should never max out your credit cards, along with not canceling credit cards that are not currently in use, even if you don’t intend to use them again.
As a guide, consider that the best FICO score can be gained if you don’t use more than 9% of the available credit across all of your cards. If you go over 50%, however, your FICO score will suffer a precipitous dive, from which it’s hard to recover.
Duration – 15%
Credibility and time are closely connected to all aspects of life, and your credit score is no different. If you’ve had an account for more than two years, a late payment will not have as much impact as it would have had on an account that’s much younger.
Accordingly, it’s best to “clean up” your old accounts than it is to open new ones. In addition, keep old, unused cards active by occasionally paying something with them. For example, you can set an automatic payment for a utility bill.
New Credit – 10%
Banks find it very fishy when you request multiple new credit requests. The more new accounts you have, along with the frequency of requests, the lower your credit score.
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