The Basics of Credit
credit is the ability to borrow money in return for a promise of future repayment.
What are the forms of credit?
- Secured: The creditor guarantees that it will be paid back by putting a lien on an asset you own. (ex: car loans, mortgages)
- Unsecured: You simply give your word to the creditor that you will repay what they got you. (ex: credit card, medical, utilities bills)
- Revolving: The creditor has to approve you for a set amount---your credit limit---and you can access the credit whenever you want and as often as you want. (ex: credit cards, home equity lines)
- Installment: You borrow a certain amount of money for a set period of time and you repay the money by making a series of fixed or installment payments. (ex: mortgages, car loans, student loans)
What cost are associated with credit?
Credit is not free money. It must be paid back as well with interest (annual percent rate)
What determines if someone gets credit and how much they get?
If they can demonstrate the three C's of creditworthiness.
- Value of what you own
- Savings, investments, property
- Use capital to pay loan if needed
- Financial ability to repay loan
- High enough income
- Major expenses and debt
- Sense of financial responsibility
- Steady income
- Long term residence
- Credit history
What You Need to Know about Credit Cards
This is a plastic card issued by the bank for the purchase of goods or services on credit.
Where can you use credit cards?
Credit cards are for the most part accepted everywhere:
- Gas Stations
- Online Shops
What are the benefits and cost of using credit cards?
- Protection for consumers
- Perks for card holders
- Cash back
- Tracking expenses
* Extra fees
- Over-the-limit=going over the credit limit
- Late fee=payments going in late
- Penalty fees=additional fee due to late payment and may result in an increased interest