Using Credit

The Basics of Credit

Credit is the ability to borrow $$ in return for a promise of future payment.

There are different types of credit. Personal loans for school, a house, a car; credit cards for smaller purchases. In order to use credit, you must pay interest (APR).

To get credit you must prove your credit worthiness. This means you must be responsible to make payments on time, and only make purchases that are necessary. Lenders judge this by using 3 factors: Capital, capacity and character. This information comes from the Credit Bureau which has a record of every adult.

The Credit Bureau assigns a credit score that reflects your credit worthiness. The higher score you have the better. With a higher score you have a lower interest rate so you pay less.

Later, all this information is gathered to develop your credit history (credit report) this contains credit information and your credit score. It is provided by the credit bureaus and lenders.

Vocabulary Watch

Credit Cards: What You Need To Know

Credit cards allow people to purchase goods or services on credit. People use credit cards at grocery stores, clothing stores, etc. Using credit cards allows you to buy more goods.

With good credit, you can get cash back and other rewards. The good thing is that if you pay your entire balance by a specified due date, you won't be charged with an interest rate (APR).

The annual fee is the annual required amount you must pay for credit cards. With credit cards, there are credit limits which set the maximum amount you can spend with the card.

Going over credit limits results in over-the-limit fees. Penalty fees are additional fees due to late payments, over credit limit, and could result in the increase in interest rate.

Smart Consumers: Don't Fall Into the Credit Card Trap

  1. Pay off the balance in full each month
  2. Don't spend on things you don't need
  3. Avoid using cards completely
  4. Limit the number of cards you have