In part one of this two-part blog series, we went over some basics on the most important terms you should know about credit. Credit is one of the single most vital areas of your financial profile, whether personal or business-related, and knowing some of its basic ins and outs can pay dividends down the line.
At Diversified Members Credit Union, we’re happy to offer a number of programs that involve credit in some way, from Visa credit card options to various Clawson auto loans, mortgage loans and other types. What are some of the other most important terms to know within the credit world? Here are several.
A vital metric that all credit users should be aware of, credit utilization is simply the percentage of available credit you’re using at any given time. For example, if your limit on a certain card is $2,500 and your balance is currently at $500, your credit utilization would be 25%.
The goal with this metric is to keep it as low as possible; for most people this is below 30%. The less of your available credit you use, the better. However, if you’re using very little of your credit, it may also indicate that you aren’t really using it at all and need to open up some new lines of credit so that your total available “pie” is larger.
In some cases, your credit might not be particularly good, and even in the event that it’s excellent, there may be certain things (such as age or recent lack of credit reference) that make a lender feel like they want additional assurances before extending you credit. That’s when you would need to find a cosigner; someone with strong enough credit, good enough income and who is willing to say “yes” to you.
The cosigner’s creditworthiness is often equally if not more important than yours, so you should never feel embarrassed or bad about asking someone to be your cosigner. It’s a major show of trust and can be the key to finally getting that car loan or mortgage you’ve been wanting.
Principal Vs Interest
Finally, everyone utilizing credit in any way should be well aware of the difference between principal and interest. Interest is the percentage of your loan that you’re charged in order to borrow money, while principal is the amount of money you actually borrow.
Say you have a $10,000 car loan at 5% interest. In the first year, you would owe $500 in interest and only $9,500 in principal. As time goes on, interest wanes while the amount you owe in principal increases until you finally pay it all off.
Credit payment calculators are extremely useful for understanding how this works when you’re trying to create a plan of action to pay individuals loans off faster.
For more on the most important credit terms to be aware of, or to learn about any of our credit union services in Clawson or nearby areas, speak to the staff at Diversified Members Credit Union today.