There are two general types of consumer credit: fixed and revolving. Fixed, or direct, credit is a loan for a fixed sum that's used for a specific purpose, such as purchasing a home or car. Revolving credit typically has a set upper limit and requires monthly payments, with interest charged on any remaining outstanding balance, as with credit cards and charge accounts. Handled properly, credit can be a great convenience. However, it can also be dangerous, if used as a way to live beyond your means. A good rule is to avoid charging anything that you won't be able to pay for when the bill arrives. With their high interest rates, most credit cards are a poor substitute for a loan. To avoid finance charges, pay the full amount every month. Limit the number of cards you have to two or three at most. Also, limit the amount you charge. It's recommended that no more than 15 percent of your net income, less house and car payments, goes to monthly credit card bills. Similar precautions should be used for fixed credit. Never take on another loan without carefully evaluating your current expenses versus your income. In general, your total debts, including home and car payments, should comprise no more than 42 percent of your take-home pay.
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