If you’ve never bought anything on credit before, it’s a good idea to find out how it works before you apply for your first credit card or loan. For anyone who needs a clearer understanding of how buying on credit works, it’s time for Dovly 101: Let’s Talk Buying with Credit.
What Does it Mean to Buy with Credit?
Buying on credit means that you use short-term financing to pay for something, which may be done in a store or online. It allows you to obtain a product or service today but not pay for it immediately. If you use a credit card and you pay off the amount borrowed within your grace period, you won’t have to pay interest. A grace period is usually 20 to 30 days.
What is Interest?
If you make payments over time, you’ll owe the original amount borrowed plus interest. Interest is a fee that you pay to the company that allowed you to buy something on credit. Different credit cards have different interest rates. The higher the interest rate on your credit card or loan, the more money you’ll have to pay on top of the amount you borrowed. Having good credit gives you the best chance of being approved for financing at low-interest rates.
Interest isn’t the only way that banks and finance companies make money by providing the means for people to buy with credit. Some credit cards charge a variety of fees such as an annual fee or a processing fee.
Pros and Cons of Buying with Credit
There are both pros and cons to using credit to buy things. A big benefit of a credit card is that it gives you the ability to make large purchases or handle unexpected emergencies and pay for them over time. When used wisely, they can help you build a good credit history.
A risk of using a credit card is that you may be tempted to buy things you can’t afford. Whenever a month goes by that you are unable to pay off the full balance borrowed, interest accumulates and increases the size of your debt. If you get in over your head in debt, you may be unable to make the required monthly payments, which can damage your credit score.
Paying Back Items Purchased with Credit
If you don’t pay back the full balance right away, you’ll be billed each month for a small percentage of the total amount owed. The minimum payment is typically 2 or 3 percent of the balance. It’s important to make your payments on time and to try to pay more than the minimum amount owed whenever you can. The longer you have an outstanding balance, the more you’ll owe in interest and the longer it will take to pay back.
Protecting Your Credit
Part of protecting your credit score includes reviewing your credit report and making sure credit balances and payment histories are being reported correctly. If you find any errors on your credit report, reach out to Dovly for help. Dovly is an automated credit repair engine that can help you track and manage your credit. Partner with Dovly today.